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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12.
CARDINAL HEALTH, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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[CARDINAL HEALTH LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 8, 2004
Notice is hereby given that the Annual Meeting of Shareholders of Cardinal
Health, Inc., an Ohio corporation (the "Company"), will be held at the Clarion
Hotel at 600 Metro Place North, Dublin, Ohio, on December 8, 2004, at 3:00 p.m.,
local time, for the following purposes:
1. To elect three Directors, each to serve for a term of three years
and until his successor is duly elected and qualified;
2. To vote on a proposal to amend the Company's Performance-Based
Incentive Compensation Plan and approve the material terms of the
performance goals under such plan, as amended, as described in this
Proxy Statement;
3. To vote on a proposal from a shareholder on annual election of
directors, if properly presented; and
4. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF THE
THREE DIRECTORS LISTED IN PROPOSAL 1, FOR PROPOSAL 2 AND AGAINST PROPOSAL 3.
Only shareholders of record at the close of business on October 25, 2004
(the "record date") are entitled to notice of and to vote at the meeting or any
adjournment or postponement thereof.
ONLY PERSONS WITH AN ADMISSION TICKET OR PROOF OF SHARE OWNERSHIP WILL BE
ADMITTED TO THE ANNUAL MEETING. IF YOU ARE A SHAREHOLDER OF RECORD, YOUR
ADMISSION TICKET IS ATTACHED TO YOUR PROXY CARD. YOU WILL NEED TO BRING IT WITH
YOU TO THE ANNUAL MEETING, TOGETHER WITH PHOTO IDENTIFICATION. IF YOUR SHARES
ARE NOT REGISTERED IN YOUR NAME, YOU MUST BRING PROOF OF SHARE OWNERSHIP (SUCH
AS A RECENT BANK OR BROKERAGE FIRM ACCOUNT STATEMENT, TOGETHER WITH PROPER
IDENTIFICATION) IN ORDER TO BE ADMITTED TO THE ANNUAL MEETING.
By Order of the Board of Directors.
/s/ PAUL S. WILLIAMS
PAUL S. WILLIAMS, Secretary
November 8, 2004
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE
URGED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE
ENCLOSED POSTAGE-PAID ENVELOPE, OR TO VOTE BY TELEPHONE OR THE INTERNET PURSUANT
TO INSTRUCTIONS PROVIDED WITH THE PROXY.
TABLE OF CONTENTS
PAGE
----
PROXY STATEMENT.................................................................................... 1
ELECTION OF DIRECTORS.............................................................................. 1
Nominees for Election at the Annual Meeting..................................................... 2
Directors Whose Terms Will Continue after the Annual Meeting.................................... 3
Board of Directors and Committees of the Board.................................................. 4
CORPORATE GOVERNANCE............................................................................... 6
Shareholder Recommendations for Director Nominees............................................... 6
Director Qualification Standards................................................................ 6
Communicating with the Board.................................................................... 6
Corporate Governance Guidelines................................................................. 7
Role of the Board............................................................................. 7
Board Composition............................................................................. 7
Committee Matters............................................................................. 7
Meetings of the Board......................................................................... 7
Assessment and Leadership Development......................................................... 7
Other Matters................................................................................. 7
Director Independence........................................................................... 8
Presiding Director.............................................................................. 9
Policies on Business Ethics..................................................................... 9
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................... 9
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE............................................ 10
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................... 11
EXECUTIVE COMPENSATION............................................................................. 13
Human Resources and Compensation Committee Report............................................... 13
Executive Compensation Tables................................................................... 17
Summary Compensation Table.................................................................... 17
Option Grants in Last Fiscal Year............................................................. 19
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values...................... 20
Shareholder Performance Graph................................................................... 21
Employment Agreements and Other Arrangements.................................................... 22
Pension Plan.................................................................................... 24
Compensation of Directors....................................................................... 24
EQUITY COMPENSATION PLAN INFORMATION............................................................... 25
AUDIT COMMITTEE REPORT............................................................................. 28
SELECTION OF INDEPENDENT ACCOUNTANTS............................................................... 29
Audit Fees...................................................................................... 29
Audit-Related Fees.............................................................................. 29
Tax Fees........................................................................................ 29
All Other Fees.................................................................................. 29
Audit Committee Audit and Non-Audit Services Pre-Approval Policy................................ 29
PROPOSAL 1 - ELECTION OF NOMINEES FOR DIRECTORS OF THE COMPANY
AT THE ANNUAL MEETING........................................................................... 30
PROPOSAL 2 - AMENDMENT OF THE COMPANY'S PERFORMANCE-BASED INCENTIVE
COMPENSATION PLAN AND APPROVAL OF THE MATERIAL TERMS OF THE PERFORMANCE
GOALS UNDER SUCH PLAN, AS AMENDED 30
General...................................................................................... 30
Description of Amendments.................................................................... 31
Description of the Plan...................................................................... 31
Administration............................................................................ 31
Eligibility............................................................................... 31
Terms of Awards........................................................................... 32
Performance Goals......................................................................... 32
Maximum Award Payable and Not Subject to Deduction Limitation Rules of Section 162(m) of
the Code............................................................................... 32
Termination of Employment................................................................. 32
Amendment and Discontinuance.............................................................. 32
Reason for Shareholder Approval.............................................................. 32
Vote Required................................................................................ 33
PROPOSAL 3 - PROPOSAL FROM SHAREHOLDER ON ANNUAL ELECTION OF
DIRECTORS....................................................................................... 33
Board of Directors Statement in Opposition to Shareholder Proposal........................... 34
Vote Required................................................................................ 35
FUTURE SHAREHOLDER PROPOSALS....................................................................... 35
OTHER MATTERS...................................................................................... 35
APPENDIX A - CARDINAL HEALTH, INC. AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER............... A-1
APPENDIX B - CARDINAL HEALTH, INC. MANAGEMENT INCENTIVE PLAN....................................... B-1
[CARDINAL HEALTH LOGO]
PROXY STATEMENT
This Proxy Statement is being furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Cardinal Health,
Inc., an Ohio corporation ("Cardinal Health" or the "Company"), for use at the
annual meeting of the shareholders of the Company to be held on Wednesday,
December 8, 2004, at the Clarion Hotel, located at 600 Metro Place North,
Dublin, Ohio 43017, at [3:00] p.m., local time, and at any adjournment or
postponement thereof (the "Annual Meeting"). This Proxy Statement and the
accompanying proxy, together with the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2004 ("fiscal 2004"), are first being sent to
shareholders of the Company on or about November 8, 2004.
The close of business on October 25, 2004 has been fixed as the record
date for the determination of shareholders of the Company entitled to notice of
and to vote at the Annual Meeting. On that date, the Company had outstanding
432,043,722 common shares, without par value ("Common Shares"). Except as set
forth below, holders of Common Shares at the record date are entitled to one
vote per share for the election of Directors and upon all matters on which
shareholders are entitled to vote.
The address of the Company's principal executive office is 7000 Cardinal
Place, Dublin, Ohio 43017.
ELECTION OF DIRECTORS
The Company's Board of Directors currently consists of thirteen members,
divided into three classes (two classes of five members each and one class of
three members). The Company's Restated Code of Regulations, as amended (the
"Code of Regulations"), currently provides that the number of Directors may be
increased or decreased by action of the Board of Directors upon the majority
vote of the Board, but in no case may the number of Directors be fewer than nine
or more than sixteen without an amendment to the Code of Regulations approved by
the affirmative vote of the holders of not less than 75% of the shares having
voting power with respect to the proposed amendment.
At the Annual Meeting, the Company's shareholders will be asked to vote
for the election of the three nominees named below, each to serve for a term of
three years and until his successor is duly elected and qualified. (See Proposal
1 below.) Common Shares represented by proxies, unless otherwise specified, will
be voted for the election of the named nominees. If, by reason of death or other
unexpected occurrence, any one or more of the nominees should not be available
for election, the proxies will be voted for the election of any substitute
nominee(s) as the Board of Directors may propose. Proxies may not be voted at
the Annual Meeting for more than three nominees.
Under Ohio law, if notice in writing is given by any shareholder entitled
to vote at the Annual Meeting to the President, a Vice President or the
Secretary of the Company, not less than 48 hours before the scheduled time of
the meeting, that the shareholder desires the voting for election of Directors
be cumulative, and if an announcement of the request for cumulative voting is
made at the beginning of the meeting by the Chairperson or Secretary, or by or
on behalf of the shareholder giving such notice, each shareholder entitled to
vote at the Annual Meeting will have the right to cumulate such voting power as
he or she possesses at such election and to give one nominee a number of votes
equal to the number of Directors to be elected multiplied by the number of
shares he or she holds, or to distribute votes on the same basis among two or
more nominees, as he or she sees fit. If voting for the election of Directors is
cumulative, the persons named in the enclosed proxy intend to vote the shares
represented thereby and by other proxies held by them so as to elect as many of
the three nominees named below as possible.
1
Votes will be tabulated by or under the direction of inspectors of
election, who will certify the results of the voting at the Annual Meeting. The
three nominees receiving the greatest number of votes will be elected Directors.
Abstentions and broker non-votes thus will not affect the results of the
election.
Listed below are the names of those persons nominated for election as
Directors of the Company (each is currently a Director of the Company), and of
those persons serving as Directors of the Company whose terms of office will
continue after the Annual Meeting; their ages, principal occupations, and
occupations held during the past five years (unless otherwise stated, the
occupations listed have been held during the entire past five years); other
public companies of which they are directors (which are shown parenthetically);
the year in which they first became a Director of the Company; and the year in
which their term as a Director is scheduled to expire (information provided as
of October 25, 2004):
NOMINEES FOR ELECTION AT THE ANNUAL MEETING
DIRECTOR TERM
NAME AGE PRINCIPAL OCCUPATION/PAST EXPERIENCE SINCE EXPIRES
-------------------------- --- ------------------------------------------- -------- -------
George H. Conrades........ 65 Chairman and Chief Executive Officer of Akamai 1999 2004
Technologies, Inc., an e-business infrastructure
provider, April 1999 to present; Venture partner in
Polaris Venture Partners, an early stage investment
company, August 1998 to present (Akamai Technologies,
Inc.; and Harley-Davidson, Inc., a motorcycle
manufacturer).
Robert L. Gerbig.......... 59 Retired Chairman and Chief Executive Officer of 1975 2004
Gerbig, Snell/Weisheimer & Associates, Inc., an
advertising agency.
Richard C. Notebaert...... 57 Chairman and Chief Executive Officer of 1999 2004
Qwest Communications International Inc., a
telecommunications systems company, July
2002 to present; President and Chief
Executive Officer of Tellabs, Inc., a
communications equipment and services
provider, September 2000 to July 2002;
Chairman and Chief Executive Officer of
Ameritech Corporation, a full-service
communications company, April 1994 to
December 1999 (Qwest Communications
International Inc.; and Aon Corporation, an
insurance brokerage, consulting and
underwriting company).
2
DIRECTORS WHOSE TERMS WILL CONTINUE AFTER THE ANNUAL MEETING
DIRECTOR TERM
NAME AGE PRINCIPAL OCCUPATION/PAST EXPERIENCE SINCE EXPIRES
-------------------------- --- ------------------------------------------- -------- -------
J. Michael Losh........... 58 Chief Financial Officer of the Company (on 1996 2005
an interim basis), July 2004 to present;
Chairman of Metaldyne Corporation, an
automotive parts manufacturer, October 2000
to April 2002; Chief Financial Officer of
General Motors Corporation, an automobile
manufacturer, 1994 to August 2000 (AMB
Property Corporation, an industrial real
estate owner and operator; Aon Corporation;
H.B. Fuller Company, a specialty chemicals
and industrial adhesives manufacturer;
Masco Corp., a manufacturer of home
improvement and building products;
Metaldyne Corporation; and TRW Automotive
Holdings Corp., a supplier of automotive
systems, modules and components).
John B. McCoy............. 61 Retired Chairman of Corillian Corporation, 1987 2005
an online banking and software services
company, June 2000 to January 2004; Chief
Executive Officer of Bank One Corporation,
a bank holding company, 1984 to December
1999 (Federal Home Loan Mortgage
Corporation, a corporation supporting
homeownership and rental housing; and SBC
Communications, Inc., a telecommunications
systems company).
Michael D. O'Halleran..... 54 Senior Executive Vice President of Aon Corporation, 1999 2005
September 2004 to present; President and Chief
Operating Officer of Aon Corporation, April 1999 to
September 2004 (Aon Corporation).
Jean G. Spaulding, M.D.... 57 Consultant, Duke University Health System, 2002 2005
a non-profit academic health care system,
January 2003 to present; Trustee, The Duke
Endowment, a charitable trust, January 2002
to present; private medical practice in
psychiatry, 1977 to present; Associate
Clinical Professorships at Duke University
Medical Center, a non-profit academic
hospital, 1998 to present; Vice Chancellor
for Health Affairs, Duke University Health
System, 1998 to 2002.
3
DIRECTOR TERM
NAME AGE PRINCIPAL OCCUPATION/PAST EXPERIENCE SINCE EXPIRES
-------------------------- --- ------------------------------------------- -------- -------
Matthew D. Walter......... 35 Chief Executive Officer of BoundTree Medical Products, 2002 2005
Inc., a provider of medical equipment to the emergency
medical market, November 2000 to present; Managing
Partner of Talisman Capital, a private investment
company, June 2000 to present; VP and General Manager
of National PharmPak, Inc., a subsidiary of Cardinal
Health, Inc., July 1996 to September 2000
(Bancinsurance Corporation, an insurance holding
company). Mr. M. Walter is the son of Robert D.
Walter, Chairman and Chief Executive Officer of the
Company.
Dave Bing................. 60 Chairman and Chief Executive Officer of The Bing 2000 2006
Group, L.L.C., an automotive parts manufacturer
(DTE Energy Company, an energy company).
John F. Finn.............. 56 Chairman and Chief Executive Officer of Gardner, Inc., 1994 2006
an outdoor power equipment distributor (One Group
Mutual Funds, a registered investment company).
John F. Havens............ 77 Director Emeritus and retired Chairman of Bank One 1979 2006
Corporation.
David W. Raisbeck......... 55 Vice Chairman of Cargill, Incorporated, a 2002 2006
marketer, processor and distributor of
agricultural, food, financial and
industrial products and services, November
1999 to present; Other merchandising and
management positions with Cargill, prior to
November 1999 (Eastman Chemical Company, a
plastics, chemicals and fibers manufacturer).
Robert D. Walter.......... 59 Chairman and Chief Executive Officer of the Company 1971 2006
(American Express Company, a travel, financial and
network services company; and Viacom Inc., a media
company). Mr. R. Walter is the father of Matthew D.
Walter, a Director of the Company.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Four regular meetings and four special meetings of the Company's Board of
Directors were held during fiscal 2004. Each Director attended 75% or more of
the regular quarterly meetings of the Board and Board Committees on which he or
she served. In addition, each Director attended 75% or more of the total of the
regular and special meetings of the Board and Board committees on which he or
she served, except for Mr. O'Halleran, who attended 15 out of 23 of such
meetings during fiscal 2004.
Each Director, other than Mr. Bing, attended the Company's 2003 Annual
Meeting of Shareholders. Absent unusual circumstances, each Director is expected
to attend the Annual Meeting of Shareholders.
4
The Audit Committee. Messrs. Finn (Chairman), Bing, Conrades, Gerbig,
O'Halleran and Raisbeck are the current members of the Board's Audit Committee,
which is empowered to exercise all powers and authority of the Board with
respect to, and represents and assists the Board with the oversight of:
- the integrity of the Company's financial statements;
- compliance with legal and regulatory requirements;
- the qualifications, independence and performance of the Company's
independent auditors; and
- the qualifications and performance of the Company's internal
auditing function.
The Audit Committee met 15 times during fiscal 2004.
The Board of Directors has determined that each of Messrs. Finn and
O'Halleran is an "audit committee financial expert" for purposes of the rules of
the Securities and Exchange Commission (the "SEC"). In addition, the Board of
Directors has determined that each of the members of the Audit Committee is
independent, as defined by the New York Stock Exchange.
The Human Resources and Compensation Committee. Messrs. McCoy (Chairman),
Havens and Notebaert and Dr. Spaulding are the current members of the Board's
Human Resources and Compensation Committee (the "Compensation Committee"), which
is empowered to exercise all powers and authority of the Board of Directors with
respect to compensation of the employees of the Company, sales to employees of
stock in the Company and grants of stock-based incentives to employees,
including options to purchase Common Shares, restricted shares and restricted
share units. The Compensation Committee also reviews and approves the Company
goals and objectives relevant to the Chief Executive Officer's compensation and
evaluates the Chief Executive Officer's performance in light of those goals and
objectives. During fiscal 2004, the Compensation Committee met four times and
acted several times by written action without a meeting, as permitted by Ohio
law. The Board of Directors has determined that each of the members of the
Compensation Committee is independent, as defined by the rules of the New York
Stock Exchange. Prior to July 25, 2004, Mr. Losh, who now also serves as the
Company's Chief Financial Officer on an interim basis, was Chairman and a member
of the Compensation Committee.
The Nominating and Governance Committee. Messrs. Conrades (Chairman),
Finn, Havens and McCoy are the current members of the Board's Nominating and
Governance Committee, which is empowered to exercise all powers and authority of
the Board of Directors with respect to identifying individuals qualified to
become Board members (consistent with criteria approved by the Board),
recommending director candidates to the Board, and reviewing and recommending
changes to the Company's corporate governance principles on an on-going basis.
The Nominating and Governance Committee will consider director nominees
recommended by shareholders as described under "Corporate Governance--Share-
holder Recommendations for Director Nominees" below. During fiscal 2004, the
Nominating and Governance Committee met five times. The Board of Directors has
determined that each of the members of the Nominating and Governance Committee
is independent, as defined by the rules of the New York Stock Exchange. Prior to
July 25, 2004, Mr. Losh was a member of the Nominating and Governance Committee.
The Executive Committee. Messrs. Conrades, Finn, McCoy and R. Walter are
the current members of the Board's Executive Committee, which is empowered to
exercise all powers and perform all duties of the Board of Directors when the
Board is not in session, other than the authority to fill vacancies on the Board
or on any committee of the Board. During fiscal 2004, the Executive Committee
met three times and acted two times by written action without a meeting, as
permitted by Ohio law. Prior to July 25, 2004, Mr. Losh was a member of the
Executive Committee.
The Audit Committee Charter, which was approved in its current form by the
Board on August 3, 2004, is attached as Appendix A to this Proxy Statement. The
charters for each of the Audit, Compensation and Nominating and Governance
Committees are available on the Company's website, at www.cardinal.com, under
the "Investor Relations -- Board committees/charters" captions. This information
also is available in print (free of charge) to any shareholder who requests it
from the Company's Investor Relations department.
5
CORPORATE GOVERNANCE
Cardinal Health's Board of Directors and management are committed to
maintaining a strong and effective corporate governance program to sustain the
confidence and commitment of the Company's shareholders, employees, customers
and suppliers, and the communities where Cardinal Health and its stakeholders
reside and do business. Because of this, Cardinal Health believes it is
important to inform its shareholders of the Company's major corporate governance
practices. Some of these practices have been in place for many years, as
implemented on either a formal or informal basis, whereas others have been
adopted as part of the Company's regular review of its corporate governance
practices in an effort to keep its practices current with regulatory and
legislative changes. The Company continues to review and update its corporate
governance practices on a regular basis to implement new best practices and to
comply with all applicable requirements.
SHAREHOLDER RECOMMENDATIONS FOR DIRECTOR NOMINEES
The Nominating and Governance Committee, which is comprised of independent
Directors, will consider nominees for director candidates recommended by
shareholders. Shareholders who wish to recommend a candidate may do so by
writing to the Nominating and Governance Committee in care of the Corporate
Secretary, Cardinal Health, Inc., 7000 Cardinal Place, Dublin, Ohio 43017.
Recommendations submitted for consideration by the committee in preparation for
the 2005 Annual Meeting of Shareholders must be received no later than
July 11, 2005, and must contain the following information: (i) the name and
address of the shareholder; (ii) the name and address of the person to be
nominated; (iii) a representation that the shareholder is a holder of the
Company's Common Shares entitled to vote at the meeting; (iv) a statement in
support of the shareholder's recommendation, including a description of the
candidate's qualifications; (v) information regarding the candidate as would be
required to be included in a proxy statement filed in accordance with the rules
of the SEC; and (vi) the candidate's written, signed consent to serve if
elected.
DIRECTOR QUALIFICATION STANDARDS
The Nominating and Governance Committee reviews with the Board from time
to time the appropriate skills and characteristics required of Board members in
the context of the make-up of the Board and developing criteria for identifying
and evaluating qualified candidates for the Board. Candidates recommended by
shareholders are evaluated based on the same criteria as candidates from other
sources. These criteria, as described in the Corporate Governance Guidelines,
include an individual's business experience and skills, independence, judgment,
integrity and ability to commit sufficient time and attention to the activities
of the Board, as well as the absence of any potential conflicts with the
Company's interests. Director candidates should also possess a skill set
regarding current issues and priorities affecting the Company and its
operations. The Nominating and Governance Committee considers these criteria in
the context of an assessment of the perceived needs of the Board as a whole and
seeks to achieve diversity of occupational and personal backgrounds on the
Board. If the Nominating and Governance Committee believes that a potential
candidate may be appropriate for recommendation to the Board, there is generally
a mutual exploration process, during which the Committee seeks to learn more
about the candidate's qualifications, background and interest in serving on the
Board, and the candidate has the opportunity to learn more about the Company,
the Board and its governance practices. The final selection of the Board's
nominees is within the sole discretion of the Board of Directors.
COMMUNICATING WITH THE BOARD
The Board of Directors has established procedures by which shareholders
and other interested parties may communicate with the Board, any committee of
the Board, any individual Director or the non-management Directors as a group.
Such parties can send communications by e-mail to bod@cardinal.com or by mail to
the Board of Directors in care of the Corporate Secretary, Cardinal Health,
Inc., 7000 Cardinal Place, Dublin, Ohio 43017. This centralized process will
assist the Board in reviewing and responding to communications. The name of any
specific intended Board recipient should be noted in the communication. The
Board has instructed the Corporate Secretary, prior to forwarding communications
to their intended recipients, to oversee the process of reviewing these
communications and not to forward certain items if they are determined to fall
into one of the following categories: (i) communications that advocate the
Company's engaging in illegal activities; (ii) communications that, under
community standards, contain offensive, scurrilous or abusive content; or (iii)
spam, junk mail and mass mailings,
6
resumes and other forms of job inquiries, surveys and business solicitations and
advertisements. Any communication which falls under one of these categories will
nonetheless be made available to any Director to whom it was directed and who
wishes to review it.
CORPORATE GOVERNANCE GUIDELINES
Cardinal Health has adopted a formal set of Corporate Governance
Guidelines (the "Guidelines"), the full text of which is available on the
Company's website, at www.cardinal.com, under the "Investor Relations --
Corporate governance guidelines" captions. This information also is available in
print (free of charge) to any shareholder who requests it from the Company's
Investor Relations department. The Nominating and Governance Committee and the
Board periodically review and update the Guidelines to implement best practices
and to comply with all applicable requirements.
The following is a summary of certain key elements of the Guidelines.
Role of the Board. The Guidelines define the Board's role as representing
and acting on behalf of all of Cardinal Health's shareholders. In representing
the shareholders, the Board's primary functions include overseeing management to
conduct Cardinal Health's businesses in conformity with applicable laws and
regulations and to establish and maintain for the Company the highest standards
of legal and ethical conduct.
Board Composition. The Guidelines mandate that a majority of the Board
must be comprised of independent Directors. The definition of "independent
Director" set forth in the Guidelines tracks the definition of "independent
director" under the rules of the New York Stock Exchange. The Guidelines also
affirm the Company's stock ownership commitment, embodied in the Guidelines for
Share Ownership adopted by the Board. These Guidelines for Share Ownership
currently require each non-management Director to own an equity interest in
Cardinal Health equal to four times his or her annual retainer within three
years of joining the Board, or by July 2006 for current Directors.
Non-management Directors are encouraged to limit the number of boards on
which they serve, taking into account potential board attendance, participation
and effectiveness on these boards. New directors will be provided with an
orientation program and all Directors are encouraged to participate in a
continuing education program developed by the Company or provided by outside
sources at the Company's expense.
Committee Matters. The Guidelines require that all members of each of the
Audit, Compensation and Nominating and Governance Committees must be
independent. Such committees generally meet at least four times a year.
Committee members are assigned, and committee chairs are selected, by the Board
upon recommendation of the Nominating and Governance Committee. Committee
membership may be rotated periodically.
Meetings of the Board. The Guidelines provide that the non-management
Directors must meet in executive session without management present at least
four times each year, and that the independent Directors must meet in executive
session at least once per year. The Guidelines further provide that the
chairperson of the Nominating and Governance Committee, or another Director
selected by the non-management Directors, will preside at these executive
sessions. Absent unusual circumstances, each Director is expected to attend all
Board meetings and all meetings of the committees of which the Director is a
member. Directors have full and free access to senior management. The Board and
each of the Audit, Compensation and Nominating and Governance Committees have
the power to retain independent outside counsel, experts and other advisors, as
they may deem necessary.
Assessment and Leadership Development. The Board, through the Compensation
Committee, will evaluate the performance of the Chief Executive Officer against
criteria established by the Board. This evaluation will be used by the
Compensation Committee in setting the Chief Executive Officer's compensation.
The Nominating and Governance Committee will conduct an annual review of Board
performance, and each committee will conduct its own self-assessment. The Board
also will work with the Compensation Committee to evaluate potential successors
to the Chief Executive Officer.
Other Matters. The Board reviews and evaluates at least annually the
long-term strategic and business plans of the Company. Senior management of the
Company reports periodically to the Compensation Committee on
7
the status of Director compensation practices in relation to other companies of
comparable size and the Company's competitors. Changes in Director compensation,
if any, are recommended by the Compensation Committee, and approved by the full
Board.
DIRECTOR INDEPENDENCE
The Board has established categorical standards to assist it in making its
determination of director independence. As embodied in the Company's Corporate
Governance Guidelines, the Board defines an "independent Director" to be a
Director who:
- is not and has not been during the last three years an employee of,
and whose immediate family member is not and has not been during the
last three years an executive officer of, the Company or any of its
subsidiaries or affiliates;
- has not received, and whose immediate family member has not received
other than for service as a non-executive employee, more than
$100,000 per year in direct compensation from the Company, other
than director and committee fees and pension or other forms of
deferred compensation for prior service, in any of the last three
years;
- is not and has not been during the last three years affiliated with
or employed by, and whose immediate family member is not and has not
been during the last three years affiliated with or employed in a
professional capacity by, a present or former (during the last three
years) internal or external auditor of the Company;
- is not and has not been during the last three years employed, and
whose immediate family member is not and has not been during the
last three years employed, as an executive officer of another
company during a time when any of the Company's present executive
officers serve on that other company's compensation committee;
- is not and has not been during the last three years an executive
officer or an employee of, and whose immediate family member is not
and has not been during the last three years an executive officer
of, a company that makes payments to, or receives payments from, the
Company for property or services in an amount which, in any single
fiscal year, exceeds the greater of $1 million, or 2% of such other
company's consolidated gross revenues; and
- has no other material relationship with the Company (either directly
or as a partner, shareholder or officer of an organization that has
a relationship with the Company).
The Board of Directors has determined that each of Messrs. Bing, Conrades,
Finn, Gerbig, Havens, McCoy, Notebaert, O'Halleran and Raisbeck and Dr.
Spaulding is independent under these categorical standards. Mr. Losh was
determined to be independent under these categorical standards until late July
2004. In July 2004, Mr. Losh began serving as Chief Financial Officer of the
Company on an interim basis and was determined therefore not to be independent.
In addition, consistent with recently adopted changes to the New York Stock
Exchange listing requirements, the Board has resolved that with respect to the
first categorical standard above, employment as an interim executive officer of
the Company will not disqualify a Director from being considered independent
under that categorical standard following termination of employment in such an
interim position. The Board also has resolved with respect to the second
categorical standard above, that compensation received for former service as an
interim executive officer need not be considered in determining independence
under that categorical standard following termination of employment in such an
interim position.
8
PRESIDING DIRECTOR
The chairperson of the Nominating and Governance Committee or another
Director selected by the non-management Directors will preside at the executive
sessions of the non-management Directors, which will occur without management
present at least four times each year, and at the executive sessions of the
independent Directors, which will occur at least once per year. Mr. McCoy has
been selected by the non-management Directors to preside over these executive
sessions.
POLICIES ON BUSINESS ETHICS
All of Cardinal Health's employees, including its principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, as well as its Directors,
are required to comply with the Company's Standards of Business Ethics to ensure
that the Company's business is conducted in a consistently legal and ethical
manner. The Sarbanes-Oxley Act of 2002 requires companies to have procedures for
the receipt, retention and treatment of complaints regarding accounting,
internal accounting controls or auditing matters and to allow for the
confidential, anonymous submission by employees of concerns regarding
questionable accounting or auditing matters. Cardinal Health currently has these
procedures in place, which are set forth in the Standards of Business Ethics.
The full text of the Cardinal Health Ethics Guide, which includes the
Standards of Business Ethics, is posted on the Company's website, at
www.cardinal.com, under the "Investor Relations -- Ethics policy" captions. This
information also is available in print (free of charge) to any shareholder who
requests it from the Company's Investor Relations department. Cardinal Health
will disclose future amendments to, or waivers from, its Standards of Business
Ethics for its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions on its website within four business days following the date of the
amendment or waiver. In addition, the Company will disclose any waiver from its
Standards of Business Ethics for its executive officers and its Directors on its
website.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A property which includes parts of the Company's former Columbus food
distribution center was previously leased by the Company from a limited
partnership, the limited partners of which include four adult children of Mr.
Havens, one individually and the other three through separate trusts. The lease
expired in accordance with its terms in February 2004. Prior to expiration of
the lease, the rent payable by the Company to the limited partnership was
$92,000 per annum (approximately $0.72 per sq. ft.), which amount is
substantially below fair market value for the rental property. From July 1, 2003
through February 28, 2004 (the expiration date of the lease), the Company paid
base rent to the partnership in the amount of approximately $61,000. During
fiscal 2004, the Company had subleased the property to a third party for
approximately $223,000, generating a gross profit net of real estate taxes of
approximately $112,000 for the Company. The Company and the partnership have
entered into a joint listing agreement offering both the formerly-leased
property (owned by the partnership) and the adjoining property (owned by the
Company) for sale as a single parcel. The listing agreement calls for allocation
of proceeds of any eventual sale of the joint parcel in proportion to the
relative square footage of the respective parcels (which results in an
allocation of proceeds of approximately 67% for the partnership and 33% for the
Company).
The Company owns a 28.7% equity interest in ArcLight Systems, LLC
("ArcLight"). In April 2002, ArcLight subleased office space from inChord
Communications, Inc. ("inChord") for a term expiring on June 30, 2008. Mr. M.
Walter is a director and minority shareholder of inChord, and his two brothers
own substantially all of the remainder of inChord. In December 2003, in
connection with the sale of certain of ArcLight's assets, the sublease was
assigned by Arclight to an unaffiliated third party. As a result of the
assignment, ArcLight has no further obligations under the sublease. During
fiscal 2004 ArcLight paid base rent to inChord of approximately $81,000 with
respect to periods prior to the assignment.
inChord and its subsidiaries also perform health care marketing and
recruiting services on behalf of the Company and its subsidiaries from time to
time in the ordinary course of business and on arm's-length terms. During
fiscal 2004, the Company paid inChord approximately $87,000 for time and
services rendered on the Company's behalf.
9
In October 2003, the Company and inChord entered into a joint marketing
program ("RxPedite") designed to promote a comprehensive package of product
commercialization services to pharmaceutical manufacturers. This program
provides a mechanism for the parties to share the joint costs of the RxPedite
marketing effort, and is terminable by either party at any time. During fiscal
2004, the Company's share of co-marketing expenses incurred in connection with
the RxPedite program was approximately $201,000.
Mr. M. Walter and his two brothers own a majority of BoundTree Medical
Products, Inc. ("BMP"), a company engaged in the pre-hospital emergency medical
supply business. Mr. M. Walter also is an officer and director of BMP. During
fiscal 2004, BMP and its affiliates purchased approximately $2,751,000 of
product from the Company and its subsidiaries in the ordinary course of business
and on arm's-length terms. This amount represented less than 3% of BMP's
consolidated gross revenues for its last full fiscal year.
Ms. Beth E. Simonetti, Senior Vice President - Shared Services of the
Company, is the sister-in-law of Ms. Carole S. Watkins, Executive Vice President
- Human Resources of the Company. There is no current reporting relationship
between Ms. Simonetti and Ms. Watkins.
Pursuant to the Company's Code of Regulations and certain indemnification
agreements, the Company is obligated to advance legal fees under certain
circumstances to current and former employees, including executive officers and
Directors, subject to limitations of the Ohio Revised Code. As part of that
obligation, the Company has advanced legal fees relating to the representation
of its Directors by counsel in connection with various derivative actions
against the Company and its Directors, and relating to the representation of
certain of its officers by counsel in connection with the SEC investigation and
related investigations described under "Item 3: Legal Proceedings" of the
Company's Form 10-K for the fiscal year ended June 30, 2004, under the headings
"Derivative Actions" and "SEC Investigation and U.S. Attorney Inquiry,"
respectively. The Company has advanced a total of approximately $1.6 million
relating to these matters since July 1, 2003.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company during fiscal 2004 and any written representations
regarding the same, except as set forth below, all officers and Directors of the
Company, as well as the beneficial holders of more than 10% of the Company's
Common Shares, timely filed all reports required under Section 16(a) of the
Exchange Act during fiscal 2004. Nine of the Company's Directors and one officer
inadvertently did not report de minimis exempt acquisitions consisting of
dividends that were reinvested in Common Share units in the Company's
non-qualified deferred compensation plans. The aggregate number of Common Share
units acquired by these Directors and the officer as a result of dividend
reinvestment was 35. The Directors have correctly reported the balance of their
holdings in the deferred compensation plans in all filings to date. The officer
has correctly reported the balance of his holdings in the deferred compensation
plans in subsequent filings.
10
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Shares as of October 25, 2004, by:
(a) the Company's Directors; (b) each other person who is known by the Company
to own beneficially more than 5% of the outstanding Common Shares; (c) the
Company's Chief Executive Officer and the other executive officers named in the
Summary Compensation Table; and (d) the Company's executive officers and
Directors as a group. Except as otherwise described in the notes below, the
following beneficial owners have sole voting and investment power with respect
to all Common Shares set forth opposite their names:
NUMBER OF
COMMON SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
------------------------------------------------------------- ------------------ ----------------
FMR Corp. (1)................................................ 50,197,132 11.6%
Wellington Management Company, LLP (2)....................... 25,256,727 5.8%
Robert D. Walter (3) (4) (5) (6)............................. 6,091,835 1.4%
Matthew D. Walter (7) (8).................................... 1,385,009 *
George L. Fotiades (4) (5) (6)............................... 545,368 *
Ronald K. Labrum (4) (5) (6)................................. 313,849 *
Richard J. Miller (4) (5) (6) (9)............................ 240,174 *
Anthony J. Rucci (4) (5) (6)................................. 232,022 *
John B. McCoy (7) (10) (11).................................. 124,375 *
Robert L. Gerbig (7)......................................... 89,530 *
John F. Havens (7) (11)...................................... 69,264 *
John F. Finn (7) (11) (12)................................... 60,358 *
Richard C. Notebaert (7) (11)................................ 36,917 *
J. Michael Losh (7) (11) (13)................................ 34,492 *
Stephen S. Thomas (4) (5) (6) (14)........................... 31,748 *
Michael D. O'Halleran (7).................................... 26,095 *
Dave Bing (7) (11)........................................... 25,143 *
George H. Conrades (7) (11).................................. 22,494 *
David W. Raisbeck (7) (11)................................... 16,895 *
Jean G. Spaulding (7) (11)................................... 13,609 *
All Executive Officers and Directors as a
Group (23 Persons) (15)................................... 9,916,196 2.3%
----------
* Indicates beneficial ownership of less than 1% of the outstanding Common
Shares.
(1) Based on information obtained from a Schedule 13G/A jointly filed with the
SEC on February 17, 2004 by FMR Corp. ("FMR"), Edward C. Johnson, III and
Abigail P. Johnson. The address of FMR is 82 Devonshire Street, Boston,
Massachusetts 02109. FMR reported that it has sole voting power with
respect to 781,067 Common Shares and sole dispositive power with respect
to all Common Shares held. The number of shares held by FMR may have
changed since the filing of the Schedule 13G/A.
(2) Based on information obtained from a Schedule 13G filed with the SEC on
February 12, 2004 by Wellington Management Company, LLP ("Wellington").
The address of Wellington is 75 State Street, Boston, Massachusetts 02109.
Wellington reported that it has shared voting power with respect to
10,663,495 Common Shares, and shared dispositive power with respect to all
Common Shares held. The number of shares held by Wellington may have
changed since the filing of the Schedule 13G.
(3) Includes a total of 2,283,564 Common Shares held in Mr. R. Walter's four
grantor retained annuity trusts and 500,000 Common Shares beneficially
owned by Mr. R. Walter through a limited liability company in which Mr. R.
Walter holds the controlling interest and is the sole manager.
11
(4) Common Shares and the percent of class listed as being beneficially owned
by the Company's named executive officers include outstanding options to
purchase Common Shares which are exercisable within 60 days of October 25,
2004, as follows: Mr. R. Walter - 1,624,517 shares; Mr. Fotiades - 502,643
shares; Mr. Labrum - 293,688 shares; Mr. Rucci - 184,207 shares (such
options being held in a trust of which Mr. Rucci is trustee and the sole
beneficiary during his life); Mr. Thomas - 0 shares; and Mr. Miller -
220,328 shares.
(5) Common Shares and the percent of class listed as being beneficially owned
by the Company's named executive officers include restricted share units
as of October 25, 2004, as follows: Mr. R. Walter - 264,644 shares; Mr.
Fotiades - 26,362 shares; Mr. Labrum - 12,000 shares; Mr. Rucci - 35,620
shares; Mr. Thomas - 31,039 shares; and Mr. Miller - 8,325 shares. Such
restricted share units are not deemed to be "beneficially owned" under the
SEC rules, but are included in the table above for the convenience of the
reader.
(6) Common Shares and the percent of class listed as being beneficially owned
by the Company's named executive officers include Common Shares in the
Company's Employee Stock Purchase Plan as of October 25, 2004, as follows:
Mr. R. Walter - 2,386 shares; Mr. Fotiades - 0 shares; Mr. Labrum - 2,376
shares; Mr. Rucci - 0 shares; Mr. Thomas - 709 shares; and Mr. Miller -
1,946 shares.
(7) Common Shares and the percent of class listed as being beneficially owned
by the listed Company Directors (except for Mr. R. Walter) include
outstanding options to purchase Common Shares which are exercisable within
60 days of October 25, 2004, as follows: Mr. Bing - 22,217 shares; Mr.
Conrades - 20,284 shares; Mr. Finn - 26,408 shares; Mr. Gerbig - 26,408
shares; Mr. Havens - 33,226 shares; Mr. Losh - 26,488 shares; Mr. McCoy -
29,540 shares; Mr. Notebaert - 20,284 shares; Mr. O'Halleran - 18,595
shares; Mr. Raisbeck - 12,220 shares; Dr. Spaulding - 12,211 shares; and
Mr. M. Walter - 12,211 shares.
(8) Includes 38,872 Common Shares held in trust for the benefit of Mr. M.
Walter; 1,112,663 Common Shares beneficially owned by Mr. M. Walter
through a limited liability company; 100,000 Common Shares held in Mr. M.
Walter's grantor retained annuity trust; 3,150 Common Shares held in
trusts for the benefit of Mr. M. Walter's children; and 705 Common Shares
held by Mr. M. Walter's spouse.
(9) Mr. Miller resigned as Executive Vice President and Chief Financial
Officer of the Company effective July 25, 2004. Includes Common Shares
beneficially owned by Mr. Miller as of July 25, 2004, except as otherwise
indicated in footnotes (4), (5) and (6) above.
(10) Includes 34,137 Common Shares held in trust for the benefit of Mr. McCoy,
6,436 Common Shares held in trust for the benefit of Mr. McCoy's son and
50,773 Common Shares held in the aggregate in Mr. McCoy's two grantor
retained annuity trusts.
(11) Includes Common Share units held under the Company's Directors Deferred
Compensation Plan as follows: Mr. Bing - 2,926 share units; Mr. Conrades -
1,210 share units; Mr. Finn - 3,651 share units; Mr. Havens - 3,033 share
units; Mr. McCoy - 3,489 share units; Mr. Notebaert - 3,033 share units;
Mr. Raisbeck - 1,675 share units; Dr. Spaulding - 1,248 share units; and
Mr. Losh - 3,129 share units. Such Common Share units are not deemed to be
"beneficially owned" under the SEC rules, but are included in the table
above for the convenience of the reader. Mr. Losh's participation in this
plan was suspended as of July 26, 2004, the effective date of his
appointment, on an interim basis, as Chief Financial Officer of the
Company.
(12) Includes 1,032 Common Shares held by Mr. Finn's spouse.
(13) Includes 1,500 Common Shares held in trust for the benefit of Mr. Losh's
daughters.
(14) Mr. Thomas ceased serving as Executive Vice President and Group President
- Automation and Information Services of the Company effective May 14,
2004, and ceased his employment with the Company effective June 14, 2004.
Includes Common Shares beneficially owned by Mr. Thomas as of June 14,
2004, except as otherwise indicated in footnotes (4), (5) and (6) above.
12
(15) Common Shares and percent of class listed as being beneficially owned by
all executive officers and Directors as a group include (i) outstanding
options to purchase an aggregate of 3,583,767 Common Shares which are
exercisable within 60 days of October 25, 2004, (ii) 380,001 restricted
share units held by all executive officers as a group; and (iii) 23,394
Common Share units held by all Directors as a group under the Company's
Directors Deferred Compensation Plan. The restricted share units and
Common Share units are not deemed to be "beneficially owned" under the SEC
rules, but are included in the table above for the convenience of the
reader.
EXECUTIVE COMPENSATION
HUMAN RESOURCES AND COMPENSATION COMMITTEE REPORT
The Company's executive compensation program is administered by the Human
Resources and Compensation Committee (the "Compensation Committee") of the
Company's Board of Directors, which has responsibility for reviewing all aspects
of the compensation program for the Company's executive officers. The
Compensation Committee is currently comprised of Messrs. Havens, McCoy and
Notebaert and Dr. Spaulding, with Mr. McCoy serving as Chairman. Prior to July
25, 2004, Director J. Michael Losh, who now also serves as the Company's Chief
Financial Officer on an interim basis, was a member and Chairman of the
Compensation Committee. The Compensation Committee's primary objective with
respect to executive compensation is to establish programs which attract and
retain key executives and align their compensation with the Company's overall
business strategies, values and performance. To this end, the Compensation
Committee has established, and the Board of Directors has endorsed, an executive
compensation philosophy which includes the following considerations:
- A "pay-for-performance" orientation that differentiates compensation
results based upon corporate, business unit and individual
performance;
- An emphasis on long-term incentives as a significant component of
total compensation in order to more closely align the interests of
Company executives with the stock interests of shareholders;
- An emphasis on total compensation vs. cash compensation, rewarding
Company executives with total compensation (including cash and stock
incentive programs) at or above competitive levels, if performance
is superior;
- Recognition that as an executive's level of responsibility
increases, a greater portion of the total compensation opportunity
should be based upon stock and other performance-based incentives;
and
- An appropriate mix of short-term and long-term compensation which
facilitates retention of talented executives and encourages Company
stock ownership and capital accumulation.
The primary components of the Company's executive compensation program are
(a) base salaries, (b) annual cash incentive opportunities and (c) long-term
incentive opportunities in the form of stock options, restricted shares and
restricted share units. This three-part approach is intended to enable the
Company to meet the requirements of the highly competitive environment in which
the Company operates while ensuring that executive officers are compensated in a
way that advances both the short- and long-term interests of shareholders. Each
primary component of executive pay is discussed below.
The executive officers' and CEO's base salary, annual bonus target and
award, and long-term incentives are reviewed at least annually to ensure market
competitiveness and to assure satisfaction of the Company's objective of
providing total executive pay which achieves the appropriate balance of variable
pay-for-performance and at-risk equity holdings. The Compensation Committee has
engaged and is advised by independent outside executive compensation consultants
in its review of Mr. R. Walter's and the other executive officers' compensation.
In making their recommendations, the independent advisors considered the
appropriate peer group of companies for the Company. The companies considered by
the independent advisors include some of, but are not the same as, those in the
Value Line Health Care Index utilized in the Shareholder Performance Graph set
forth below and
13
represent a broader spectrum of wholesale, retail and manufacturing companies
that the Compensation Committee believes to be a more representative measure of
the size, scope, performance and complexity of the competitive market for
executive talent.
In reviewing compensation of the Company's executive officers for fiscal
2004 (including that of Mr. R. Walter), the Compensation Committee considered
multiple factors, including the Company's performance in difficult economic
conditions, size and complexity, overall quality of earnings performance,
balance sheet and cash flow performance, expansive foreign operations and total
shareholder return. The Compensation Committee also considered each executive
officer's contribution toward positioning the Company for future expansion and
success.
In establishing Mr. R. Walter's compensation for fiscal 2004, the
Compensation Committee considered the growth and expansion of the Company's
business from previous years, successful integration of previously acquired
businesses, strategic positioning and continued business development activities,
more diversified lines of business, geographically diverse work force and the
Company's growth in comparison to other S&P 500 companies. The Compensation
Committee observed that fiscal 2004 was a challenging year during which the
executive officers were steering certain of the Company's business units through
transitions. As a result, although the Company met or exceeded certain of its
financial goals for fiscal 2004, including exceeding its operating cash flow
targets, the Company did not meet certain other financial goals, including its
earnings growth targets.
Base Salaries. Base salaries for Company executives are generally subject
to annual review and adjustment on the basis of individual and Company
performance; level of responsibility; and competitive, inflationary and internal
equity considerations. In order to effectively recruit and retain key managers,
the Company has adopted a base salary philosophy which takes into account
competitive market compensation levels. In considering Mr. R. Walter's fiscal
2004 base salary, the Compensation Committee considered the same factors as
those considered for other executive officers.
Annual Cash Incentives. As part of the Company's executive compensation
program, Company executives are eligible to receive annual cash incentive awards
pursuant to the Company's Management Incentive Plan ("MIP"). Targeted MIP
incentive amounts, which are designed to provide competitive incentive pay and
reflect the Company's pay-for-performance philosophy, are established annually.
Targeted MIP incentive amounts generally represent a greater portion of an
executive's overall potential cash compensation as levels of responsibility and
function increase. Performance objectives intended to focus attention on
achieving key goals are established for the Company and for each significant
business unit within the Company at the beginning of each fiscal year. In
addition, individual performance objectives are established for each executive,
which include both specific performance goals and other, more qualitative and
developmental criteria. The maximum achievable incentive award after applying
the adjustments for performance is an additional 100% of the target award.
Incentive awards pursuant to the Company's MIP are determined by the
Compensation Committee based upon corporate, business unit and individual
performance criteria, with corporate performance serving as the principle
threshold for funding of the incentive award pool. The Compensation Committee
also has discretion to consider the quality of the Company's earnings and
related issues in determining achievement of the Company earnings growth as well
as attainment of the specific target for Company earnings growth and Net
Earnings After Tax for each business unit.
Although the Company achieved double-digit earnings per share growth
during fiscal 2004, actual operating earnings were well below the Company's
internal performance goals for the year, particularly during the third and
fourth quarters. Based on this shortfall and other qualitative factors
considered by the Compensation Committee, overall funding of the MIP incentive
award pool for the Company's management level employees was significantly below
targeted amounts. However, in light of the Company's pay-for-performance
philosophy, it was determined that the Company's executive officers (including
Mr. R. Walter) would not share in that incentive award pool, and therefore would
receive no incentive awards for fiscal 2004. The Compensation Committee
determination of a zero incentive award payout for the Company's executive
officers was based upon the factors described above applicable to fiscal 2004,
and does not reflect the Company's overall objectives concerning annual cash
incentives for its executive officers.
Certain executive officers' bonuses are paid under the Cardinal Health,
Inc. Performance-Based Incentive Compensation Plan (the "Performance-Based
Plan"). The Budget Reconciliation Act of 1993 (the "Act") amended the Internal
Revenue Code of 1986, as amended (the "Code") to add Section 162(m), which
prohibits a deduction to
14
any publicly held corporation for non-performance-based compensation paid to a
"covered employee" in excess of $1 million per year (the "Dollar Limitation"). A
covered employee is an employee who, on the last day of a company's taxable
year, is the chief executive officer of the company or an employee who appears
in the Summary Compensation Table by reason of being one of the four most highly
compensated executive officers for the taxable year (other than the chief
executive officer). In anticipation that the deductibility of compensation paid
to Mr. R. Walter and other executive officers could be affected by the Act, in
August 1996, the Company's Board of Directors adopted the Performance-Based
Plan, the material terms of the performance goals of which have been approved by
the Company's shareholders. Compensation paid in accordance with the
Performance-Based Plan generally will not be applied toward the Dollar
Limitation. On August 4, 2004, the Board of Directors approved proposed
amendments to the Performance-Based Plan, and such amendments are being
submitted to the Company's shareholders for approval at this year's Annual
Meeting.
Messrs. R. Walter, Fotiades, Labrum, Rucci, Thomas and Miller were the
Company's covered employees for fiscal 2004. Under the terms of the
Performance-Based Plan, and in accordance with Section 162(m), a maximum bonus
potential level is set for each covered employee if the performance goals
established by the Compensation Committee are fully satisfied. However, as noted
above, the Compensation Committee determined in its discretion that no bonuses
would be awarded to any covered employee or executive officer for fiscal 2004.
Long-Term Stock Incentives. The Company has granted equity-based awards to
its executives under the Company's Amended and Restated Equity Incentive Plan,
as amended (the "Equity Incentive Plan"). The Equity Incentive Plan was approved
by the Company's shareholders in November 1995, with amendments thereto approved
by the Company's shareholders in November 1998. The Equity Incentive Plan is
designed to align a significant portion of the executive compensation package
with the long-term interests of the Company's shareholders by providing an
incentive that focuses attention on managing the Company from the perspective of
an owner with an equity stake in the business. The Equity Incentive Plan
provides for the grant of several types of equity-based awards, including stock
options, restricted shares and restricted share units.
Although not required to do so, the Company has consistently made annual
grants of stock options to its management personnel, including its executive
officers. This annual grant program is designed to provide Company managers,
over a number of years, multiple stock options, each granted with an exercise
price equal to the market price for Common Shares on the date of the grant.
Individual option grants are determined by the Compensation Committee based on a
manager's current performance, potential for future responsibility, and salary
multiples designed to increase the portion of the total compensation opportunity
represented by stock incentives as a manager's level of responsibility
increases. Because a primary purpose of granting stock options is to encourage
positive future performance, when granting options in fiscal 2004 the
Compensation Committee did not consider the number of options granted to an
individual in previous years. The Company's standard stock option agreement
contains provisions providing for forfeiture of the option or option value
received in the event the option holder engages in certain behavior in
competition with or contrary to the interests of the Company. The Compensation
Committee places a relatively heavy emphasis on equity incentives, consistent
with its philosophy that stock incentives more closely align the interests of
Company managers with the long-term interests of shareholders.
On November 17, 2003, approximately 4,860 employees below the executive
officer level were granted stock options for fiscal 2004 under the Company's
Broadly-based Equity Incentive Plan, as amended (the "Broadly-based Equity
Incentive Plan"). This program is an important element of the Company's efforts
to identify, develop and motivate key employees who will be influential in the
achievement of the Company's long-term goals.
Grants of restricted shares and restricted share units are intended to
reward exceptional performance with a long-term benefit in lieu of cash, to
facilitate stock ownership and to deter recruitment of key Company managers by
competitors and others. Unlike the Company's stock option program, restricted
share and restricted share unit grants are not made on an annual or other
regularly established basis. Recipients of restricted share and restricted share
unit grants are subject to restrictions on the disposition of the stock during a
period determined by the Compensation Committee at the time of grant. Generally,
restricted share and restricted share unit awards are forfeited by their terms
if the recipient terminates employment with the Company prior to the expiration
of the restriction period. Restricted share and restricted share unit awards
are, in most instances, also forfeited by their terms if the recipient engages
in certain behavior in competition with or contrary to the interests of the
Company.
15
Consistent with the Company's philosophy of linking total compensation to
stock performance for all of its executive officers, a significant portion of
Mr. R. Walter's overall compensation package is comprised of stock incentives.
In November 2003, the Compensation Committee granted Mr. R. Walter an option to
purchase 507,086 Common Shares with an exercise price of $61.38 per share (the
market price on the date of grant) as part of the fiscal 2004 annual option
grant made to Company executives under the Company's Equity Incentive Plan.
Consistent with the other options granted as part of these annual grants, this
option vests on the third anniversary of the grant date and has a term of 10
years. In making the fiscal 2004 grant, the Compensation Committee considered
several of the same factors as those considered for the other executive
officers, including implementation of the Compensation Committee's objective to
more closely align the Company's stock incentive awards with those of the
market. In addition, the Compensation Committee took into account Mr. R.
Walter's leadership effectiveness, as well as the Company's multi-year financial
performance, its strategic positioning, the overall market competitiveness of
Mr. R. Walter's total compensation package and the terms of Mr. R. Walter's
current employment agreement (see "Employment Agreements and Other Arrangements"
below). The option granted to Mr. R. Walter during the fiscal year also contains
provisions for forfeiture of the option or option value received in the event
Mr. R. Walter engages in certain behavior in competition with or contrary to the
interests of the Company. As noted above, because a primary purpose of granting
stock options is to encourage positive future performance, when granting options
to Mr. R. Walter in fiscal 2004 the Compensation Committee did not consider the
number of options granted in previous years.
Guidelines for Share Ownership. In an effort to directly link executive
officers' and Directors' financial interests with those of shareholders, the
Compensation Committee approved for fiscal 2004 Guidelines for Share Ownership
for executive officers and non-management Directors. The guidelines specify a
number of shares that executive officers and non-management Directors must
accumulate and hold within three years of joining the Company or the Board, or
by July 2006 for current executive officers and Directors. The specific share
requirements for executive officers are based on a multiple of base salary
ranging from three to five times base salary, with the higher multiples
applicable to the Company's executive officers having the greatest level of
responsibility. The specific share requirement for each non-management Director
is four times his or her annual retainer.
Impact of Internal Revenue Code Section 162(m). As discussed above,
Section 162(m) of the Code prohibits a deduction to any publicly held
corporation for non-performance-based compensation paid to a covered employee in
excess of the Dollar Limitation. It is the Compensation Committee's general
policy to minimize the effect of Section 162(m) on the Company's compensation
expense. The Compensation Committee reserves the authority to award
non-deductible compensation in such circumstances as it deems appropriate.
Further, because of ambiguities and uncertainties as to the application and
interpretation of Section 162(m) and the regulations issued thereunder, no
assurance can be given, notwithstanding the Company's efforts, that compensation
intended by the Company to satisfy the requirements for deductibility under
Section 162(m) does in fact do so.
Conclusion. As described above, the Company's executive compensation
program provides a significant link between total compensation and the Company's
performance and long-term shareholder value consistent with the compensation
philosophies set forth above. This program is believed to be a significant
factor in the Company's growth and profitability and the resulting long-term
gains achieved by the Company's shareholders.
Submitted by the Human Resources and Compensation Committee of the Board.
November 1, 2004 John B. McCoy, Chairman
John F. Havens
Richard C. Notebaert
Jean G. Spaulding
16
EXECUTIVE COMPENSATION TABLES
The following information is set forth with respect to the Company's Chief
Executive Officer, each of the Company's four other most highly compensated
executive officers, and one additional individual for whom disclosure would have
been provided but for the fact that the individual was not serving as an
executive officer of the Company at June 30, 2004.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------------------------
OTHER
ANNUAL RESTRICTED SECURITIES
COMPEN- STOCK UNDERLYING ALL OTHER
NAME AND FISCAL SALARY BONUS SATION AWARDS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($)(2) (#) ($)(3)
------------------------------- ------ ---------- ---------- ---------- ----------- ---------- ------------
Robert D. Walter 2004 $1,037,500 $ 0 $112,363(4) $ 0 507,086 $ 12,349
Chairman and 2003 $1,015,144 $2,112,135 $111,374(4) $ 0 486,009 $ 36,473(5)
Chief Executive Officer 2002 $1,000,000 $2,701,370 $173,545(4) $10,354,500(6) 440,529 $ 208,938
George L. Fotiades 2004 $ 622,692 $ 0 -- $ 0 225,000 $ 11,278
President and 2003 $ 531,633 $ 387,412 -- $ 0 250,000 $ 35,957
Chief Operating Officer 2002 $ 495,692 $ 498,482 -- $ 0 67,915 $ 1,052,667(7)(8)
Ronald K. Labrum 2004 $ 488,540 $ 0 -- $ 306,900(6) 85,280 $ 7,321
Chairman and Chief Executive 2003 $ 429,423 $ 247,562 -- $ 0 53,019 $ 29,512
Officer-Integrated Provider 2002 $ 418,462 $ 317,886 -- $ 0 44,604 $ 28,444
Solutions and Cardinal
Health-International
Anthony J. Rucci 2004 $ 445,800 $ 0 -- $ 0 57,021 $ 8,864
Executive Vice President and 2003 $ 433,639 $ 279,068 -- $ 0 48,822 $ 34,061
President of Strategic 2002 $ 416,219 $ 398,263 -- $ 0 48,164 $ 383,729(7)
Corporate Resources
Stephen S. Thomas 2004 $ 427,662 $ 0 -- $ 0 0 $ 784,958(9)
Former Executive Vice 2003 $ 397,331 $ 378,727 -- $ 0 91,237 $ 37,493
President and Group President- 2002 $ 380,694 $ 372,003 -- $ 0 38,546 $ 698,229(7)
Automation and Information
Services
Richard J. Miller 2004 $ 407,400 $ 0 -- $ 0 52,134 $ 8,624
Former Executive Vice 2003 $ 396,309 $ 247,555 -- $ 0 44,686 $ 34,789
President and Chief Financial 2002 $ 371,361 $ 343,000 -- $ 0 41,233 $ 309,729(7)
Officer
(1) " -- " indicates that the aggregate amount of perquisites and other
personal benefits, securities or property in the aggregate did not exceed
the lesser of $50,000 or 10% of the total of Salary and Bonus, and the
executive had no other compensation reportable under this category.
(2) Aggregate restricted share unit holdings and values on June 30, 2004
(based upon the closing price of the Common Shares on the New York Stock
Exchange on that date, the last trading day of fiscal 2004) for the named
executive officers are as follows: Mr. R. Walter - 264,644 shares,
$18,538,312; Mr. Fotiades - 26,362 shares, $1,846,658; Mr. Labrum - 5,000
shares, $350,250; Mr. Rucci - 25,620 shares, $1,794,681; Mr. Thomas -
31,039 shares, $2,174,282; and Mr. Miller - 8,325 shares, $583,166.
Dividend equivalents are paid in cash on restricted share units.
(3) Amounts shown represent Company contributions to the executive's account
under the Company's Profit Sharing, Retirement and Savings Plan and
Deferred Compensation Plan for fiscal 2004 as follows: Mr. R. Walter -
$12,349; Mr. Fotiades - $11,278; Mr. Rucci - $8,864; Mr. Labrum - $7,321;
Mr. Thomas - $8,703; and Mr. Miller - $8,624.
17
(4) Includes $112,363, $111,012 and $160,827 as the incremental cost to the
Company, and related gross-up for taxes, relating to personal use by Mr.
R. Walter of a Company airplane for the fiscal years ended June 30, 2004,
2003 and 2002, respectively.
(5) Includes $2,364 for premiums paid by the Company on a split-dollar life
insurance arrangement entered into on April 16, 1993 between the Company,
Mr. R. Walter and a trust for Mr. R. Walter's family. This arrangement
terminated by its terms on January 12, 2003, and the Company recovered the
then-current cash surrender value of the underlying insurance policy.
(6) Includes restricted share units that vest as follows: Mr. R. Walter -
150,000 shares vesting on January 15, 2006; and Mr. Labrum - 5,000 shares
vesting on November 17, 2006.
(7) Includes the vesting of cash incentive awards, granted in the fiscal year
ended June 30, 2000, as follows: Mr. Fotiades - $878,750; Mr. Rucci -
$351,500; Mr. Thomas - $666,000; and Mr. Miller - $277,500. Employment
agreements between the Company and each of these executive officers during
the fiscal year ended June 30, 2000 provided for such cash incentive
awards if the executive officer remained employed by the Company through
February 9, 2002. The agreements with Messrs. Fotiades and Thomas have
since been replaced and superceded. See "Employment Agreements and Other
Arrangements" below. The agreements with Messrs. Rucci and Miller have
since expired.
(8) Includes $166,667 paid to Mr. Fotiades as an incentive fee pursuant to
certain provisions contained in an employment agreement entered into
between the Company and Mr. Fotiades at the time the Company acquired R.P.
Scherer Corporation. The agreement has since been replaced and superceded.
See "Employment Agreements and Other Arrangements" below.
(9) Includes $776,255 in severance payable to Mr. Thomas pursuant to certain
provisions of an employment agreement entered into between the Company and
Mr. Thomas during the fiscal year ended June 30, 2003. See "Employment
Agreements and Other Arrangements" below.
18
OPTION GRANTS IN LAST FISCAL YEAR (1)
INDIVIDUAL GRANTS
--------------------------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OPTION TERM (4)
GRANTED IN FISCAL PRICE EXPIRATION ----------------------------------
NAME (#)(1) YEAR (2) ($/Sh)(3) DATE 0% ($) 5% ($) 10% ($)
------------------ ---------- ---------- -------- ---------- ----- ----------- -----------
Robert D. Walter 507,086 4.3% $ 61.38 11/17/2013 $0.00 $19,574,307 $49,605,136
George L. Fotiades 225,000 1.9% $ 64.11 2/1/2014 $0.00 $ 9,071,648 $22,989,337
Ronald K. Labrum 85,280 0.7% $ 61.38 11/17/2013 $0.00 $ 3,291,940 $ 8,342,423
Anthony J. Rucci 57,021 0.5% $ 61.38 11/17/2013 $0.00 $ 2,201,099 $ 5,578,017
Stephen S. Thomas 0 0% -- -- $0.00 -- --
Richard J. Miller 52,134 0.4% $ 61.38 11/17/2013 $0.00 $ 2,012,453 $ 5,099,952
(1) All options granted during the fiscal year to the named executive officers
are nonqualified stock options granted under the Company's Equity
Incentive Plan, are exercisable in full on and after the third anniversary
from the date of grant, and have a term of 10 years.
(2) Based on total options to purchase 11,842,030 Common Shares granted to all
employees during fiscal 2004 under the Company's Equity Incentive Plan and
Broadly-based Equity Incentive Plan, as amended.
(3) Market price on date of grant.
(4) These amounts are based on hypothetical annual appreciation rates of 0%,
5% and 10% over the full term of the applicable option and are not
intended to forecast the actual future appreciation of the Company's stock
price. No gain to optionees is possible without an actual increase in the
price of the Company's Common Shares, which benefits all of the Company's
shareholders.
19
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXECISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE FY-END (#) FY-END ($)(2)
ACQUIRED ON REALIZED ------------------------------------------------------
NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------ ------------ ----------- ----------- ------------- ----------- -------------
Robert D. Walter -0- $ 0 1,624,517 1,433,624 $52,550,526 $ 7,000,887
George L. Fotiades -0- $ 0 434,728 542,915 $13,865,595 $ 2,006,434
Ronald K. Labrum -0- $ 0 249,084 182,903 $11,681,379 $ 940,346
Anthony J. Rucci -0- $ 0 136,043 154,007 $ 3,699,066 $ 693,259
Stephen S. Thomas 45,000 $ 1,447,545 133,768 129,783 $ 3,512,092 $ 466,324
Richard J. Miller -0- $ 0 179,095 138,053 $ 5,427,275 $ 628,481
(1) Value calculated as the amount by which the fair market value of the
Common Shares on the date of exercise exceeds the option exercise price
before payment of any taxes.
(2) Value calculated as the amount by which the market value of the Common
Shares, based upon the closing price per Common Share of $70.05 on June
30, 2004 (the last trading day of fiscal 2004), exceeds the option
exercise price.
20
SHAREHOLDER PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total return of
the Company's Common Shares with the cumulative total return of the Standard &
Poor's Composite - 500 Stock Index and the Value Line Health Care Sector Index,
an independently prepared index which includes more than 100 companies in the
health care industry (the "Value Line Health Care Index" or "Peer Group"). The
graph assumes, in each case, an initial investment of $100 as of June 30, 1999
based on the market prices at the end of each fiscal year through and including
June 30, 2004, with the Value Line Health Care Index investment weighted on the
basis of market capitalization at the beginning of each such fiscal year, and
assuming reinvestment of dividends (and taking into account all stock splits
during such periods).
[SHAREHOLDER PERFORMANCE GRAPH]
Period Ended June 30 1999 2000 2001 2002 2003 2004 September 30,
(unless otherwise noted) 2004*
---------------------------- ------- ------ ------ ------ ------ ------ -------------
Cardinal Health, Inc. $100.00 115.63 162.34 144.70 151.77 165.65 103.58
S&P 500 100.00 105.97 82.90 72.11 70.99 83.11 81.20
Value Line Health Care Index 100.00 117.44 112.82 97.24 102.16 111.43 107.39
*Provided for informational purposes; not reflected on performance graph shown
above.
21
EMPLOYMENT AGREEMENTS AND OTHER ARRANGEMENTS
During fiscal 2004, the Company amended and restated employment agreements
with Mr. R. Walter (the "Walter Agreement"), Mr. Fotiades (the "Fotiades
Agreement") and Mr. Labrum (the "Labrum Agreement"). Mr. Thomas' employment,
which has been terminated, was governed by an employment agreement dated
February 5, 2003 (the "Thomas Agreement"). In addition, in July 2004, the
Company entered into an employment agreement with Mr. Losh, who was appointed
Chief Financial Officer of the Company on an interim basis. Each of Messrs. R.
Walter, Fotiades, Labrum, Thomas and Losh agreed under their respective
agreements to comply with certain non-compete and non-solicitation covenants
during the term of their employment and generally for a period ranging from one
to two years thereafter. In addition, Messrs. R. Walter, Fotiades, Labrum,
Thomas and Losh are obligated to keep the Company's proprietary information and
trade secrets confidential.
The Walter Agreement amends and restates as of February 1, 2004, the
employment agreement dated November 20, 2001 (the "Initial Walter Agreement")
between the Company and Mr. R. Walter. Under the Walter Agreement, the Company
agreed to employ Mr. R. Walter as Chairman and Chief Executive Officer until
February 1, 2007. However, commencing on February 1, 2006, the term shall be
extended each day by one day to create a new one year term until, at any time at
or after such date, either party provides written notice of termination to be
effective one year from the notice date.
The Walter Agreement provides for an annual base salary of not less than
$1,000,000, which will be reviewed simultaneously with the salaries of all the
Company's executive officers, and eligibility for an annual cash bonus target of
at least 250% of annual base salary (although no bonus was awarded to Mr. R.
Walter for fiscal 2004). The Walter Agreement further provides for equity and
non-equity awards under the Company's long-term incentive compensation plans
consistent with past practice and competitive pay practices, including an annual
stock option award with a value of no less than 3,000% of annual base salary in
terms of dollars at work. The Initial Walter Agreement provided Mr. R. Walter
with 150,000 shares of deferrable restricted share units effective November 20,
2001. The Walter Agreement, as revised in fiscal 2004, extends the vesting date
of those restricted share units from June 30, 2004 to January 15, 2006 and the
vesting date of certain options from November 19, 2004 to January 15, 2006.
Under the Walter Agreement, if the Company terminates Mr. R. Walter's
employment other than for cause, death or disability, or if Mr. R. Walter
terminates his own employment for good reason, then he is paid: (i) any earned
but unpaid salary; (ii) a prorated portion of his recent average bonus (based on
the average bonus earned in the three previous fiscal years, but not less than
his annual target bonus); and (iii) two times the sum of his annual salary then
in effect and recent average bonus (or three times such sum if a change of
control has occurred within the last three years). If Mr. R. Walter's employment
is terminated by death or disability, then he is paid: (i) any earned but unpaid
salary; and (ii) a prorated portion of his recent average bonus. If Mr. R.
Walter's employment is terminated for any of the reasons above, any stock
options, restricted shares and restricted share units held by Mr. R. Walter vest
immediately and are exercisable until the end of the applicable term of such
award (except that under the Walter Agreement Mr. R. Walter will be treated as a
consulting employee and these awards continue to vest in accordance with their
terms where Mr. R. Walter's employment is terminated by disability or retirement
and the award agreement does not provide for immediate vesting). If the Company
terminates Mr. R. Walter's employment for cause or if Mr. R. Walter terminates
his own employment without good reason, then he is paid any earned but unpaid
salary but no portion of his bonus. If Mr. R. Walter's employment is terminated
for any of the reasons above, to the extent not already provided or paid, he
will also receive any other benefits to which he is entitled pursuant to, and in
accordance with the terms of, existing Company programs and plans. In the event
that any payments made to Mr. R. Walter would be subject to the excise tax
imposed on "parachute payments" by the Code, under the Walter Agreement, the
Company will "gross-up" Mr. R. Walter's compensation for all such excise taxes
and any federal, state and local taxes applicable to such gross-up payment
(including any penalties and interest).
The Company recently identified an issue with respect to an option award
that the Compensation Committee and Board granted to Mr. R. Walter in November
1999 for 1,425,000 shares (giving effect to stock splits occurring after the
date of grant). This option award was in excess of that permitted to be granted
to a single individual during any fiscal year under the Company's Equity
Incentive Plan. The maximum number of shares that could be granted pursuant to
the terms of the Equity Incentive Plan was 562,500 shares (although the Company
would have been permitted at the time to make a larger grant outside of such
Plan). The information set forth in the
22
"Security Ownership of Certain Beneficial Owners and Management," "Aggregated
Option Exercises in Last Fiscal Year and FY-End Values" and "Equity Compensation
Plan Information" tables elsewhere in this Proxy Statement with respect to Mr.
R. Walter has been revised to reflect the maximum number of shares that could be
granted under the Plan. The Compensation Committee is currently exploring
alternatives to substitute the remaining portion of the stock option granted to
him in November 1999 in excess of 562,500 shares with equivalent value.
The Fotiades Agreement replaced the employment agreement previously in
place between the Company and Mr. Fotiades. Under the Fotiades Agreement, the
Company agreed to employ Mr. Fotiades as President and Chief Operating Officer
for three years commencing on February 1, 2004. The Fotiades Agreement provides
for an annual base salary of not less than $725,000 and an annual bonus target
equal to 160% of annual base salary payable under the terms of the bonus plan
for which Mr. Fotiades is eligible (although no bonus was awarded to Mr.
Fotiades for fiscal 2004). The Fotiades Agreement further provides for an
initial stock option grant of 225,000 shares (the "2004 Option"), eligibility
for annual stock option grants beginning in fiscal year 2006 and relocation
benefits.
Under the Fotiades Agreement, if the Company terminates Mr. Fotiades'
employment without cause before February 1, 2009, if Mr. Fotiades' employment is
terminated within one year after a change of control (other than because of
death, incapacity, retirement or for cause) or if he terminates his employment
within one year after a change of control that leads to a qualifying material
diminution of his duties, then he receives: (i) two times the sum of his salary
in effect on the day immediately prior to termination and his annual bonus
target; (ii) any vested benefits required to be paid or provided in law; and
(iii) all benefits provided in the 2004 Option agreement and a November 18, 2002
option agreement. If Mr. Fotiades terminates his employment or if his employment
is terminated by incapacity, death, retirement or for cause, then he receives:
(i) any earned but unpaid salary; (ii) benefits under any long-term disability
insurance coverage (in the event of termination due to incapacity); (iii) any
vested benefits required to be paid or provided in law; and (iv) any benefits
provided for under his then-outstanding equity incentive awards.
The Labrum Agreement replaced the employment agreement previously in place
between the Company and Mr. Labrum. Under the Labrum Agreement, the Company
agreed to employ Mr. Labrum as Executive Vice President and Group President -
Medical Products and Services for three years commencing on November 5, 2003.
The Labrum Agreement provides for an annual base salary of not less than
$480,000 and an annual bonus target equal to 90% of annual base salary payable
under the terms of the bonus plan for which Mr. Labrum is eligible (although no
bonus was awarded to Mr. Labrum for fiscal 2004). The Labrum Agreement further
provides for a stock option grant of 25,000 shares (the "FY2004 Option") and a
grant of 5,000 restricted share units as of November 17, 2003.
Under the Labrum Agreement, if the Company terminates Mr. Labrum's
employment without cause, if Mr. Labrum's employment is terminated within one
year after a change of control (other than because of death, incapacity or for
cause) or if he terminates his employment within one year after a change of
control that leads to a material diminution of his duties, then he receives: (i)
the sum of his salary in effect on the day immediately prior to termination and
his annual bonus target; (ii) any vested benefits required to be paid or
provided in law; and (iii) all benefits provided for under the FY2004 Option. If
Mr. Labrum terminates his employment or if his employment is terminated by
incapacity, death or for cause, then he receives: (i) any earned but unpaid
salary; (ii) benefits under any long-term disability insurance coverage (in the
event of termination due to incapacity); (iii) any vested benefits required to
be paid or provided in law; and (iv) any benefits provided for under the FY2004
Option.
Mr. Thomas' employment with the Company terminated on June 14, 2004. Under
the Thomas Agreement, the Company agreed to employ Mr. Thomas as Executive Vice
President and Group President - Automation and Information Services for three
years commencing on February 5, 2003. The Thomas Agreement provided for an
annual base salary of not less than $408,000 and an annual bonus target equal to
90% of annual base salary payable under the terms of the bonus plan for which
Mr. Thomas was eligible (although no bonus was awarded to Mr. Thomas for fiscal
2004). The Thomas Agreement further provided for an initial stock option grant
of 50,000 shares (the "FY2003 Option").
The Thomas Agreement also provided for severance payments and benefits to
Mr. Thomas if the Company terminated Mr. Thomas' employment without cause prior
to the end of his employment period, including (i) payment of the sum of his
salary in effect on the day immediately prior to termination and his annual
bonus
23
target; (ii) any vested benefits required to be paid or provided in law;
and (iii) all benefits provided for under the FY2003 Option. The termination by
the Company of Mr. Thomas' employment was without cause, and pursuant to the
terms of the Thomas Agreement, a severance payment of $776,255 is payable to Mr.
Thomas in twelve equal monthly installments beginning January 2005.
The Company recently entered into an employment agreement with Mr. Losh
(the "Losh Agreement"). Under the Losh Agreement, the Company agreed to employ
Mr. Losh as interim Chief Financial Officer for one year commencing on July 26,
2004. As compensation for the services rendered thereunder, the Losh Agreement
provides for an option grant to purchase 210,000 shares at an exercise price of
$44 per share, the closing price of the Common Shares on July 27, 2004. The
option becomes exercisable in full on July 27, 2007. The Losh Agreement also
provides that Mr. Losh is eligible to receive reimbursement for reasonable
expenses incurred by Mr. Losh during his employment (including travel and living
expenses) in accordance with policies, practices and procedures of the Company
applicable to Mr. Losh. During his employment, Mr. Losh is not eligible to
receive annual option grants during fiscal 2005, unless approved by the
Compensation Committee, or compensation payable solely to non-employee directors
of the Company.
The Company's Equity Incentive Plan, as well as the Company's Stock
Incentive Plan, as amended (the "Stock Incentive Plan"), which has been replaced
by the Equity Incentive Plan as to ongoing grants, provide for acceleration of
the vesting of stock options, restricted share awards and restricted share unit
awards based upon the occurrence of a change of control of the Company. Messrs.
R. Walter and Miller continue to hold options that remain outstanding under the
Stock Incentive Plan.
PENSION PLAN
Mr. Fotiades participates in a defined benefit and supplemental plan (the
"Pension Plan") which was assumed by the Company when it acquired R.P. Scherer
Corporation in 1998.
Benefits payable under the Pension Plan at retirement are determined
primarily by average final compensation and years of service. The compensation
covered by the Pension Plan for Mr. Fotiades is substantially the same as that
set forth in the Salary and Bonus columns of the Summary Compensation Table set
forth on page 21 of this Proxy Statement. The defined benefit plan was frozen as
of December 31, 2002, and the supplemental plan was frozen as of December 31,
2001. No additional benefits will be earned and no compensation or credited
service will be considered beyond these dates. Mr. Fotiades has 6.5 years of
service credited under the defined benefit plan and 5.5 years of service
credited under the supplemental plan.
The annual amount payable to Mr. Fotiades upon retirement is $20,645. The
benefits are payable as a straight-life annuity beginning at age 65. These
benefits are not subject to any deduction for Social Security or any other
offset amounts.
COMPENSATION OF DIRECTORS
During fiscal 2004, the Company's Directors each were paid a retainer of
$10,000 per quarter. The chairperson of the Audit Committee and each Director
serving as the chairperson of another Board committee received an additional
$3,000 and $1,500 per quarter, respectively, for such service during fiscal
2004. Effective as of the beginning of fiscal 2005, the fees for the chairperson
of the Audit Committee were increased to $3,750 per quarter, and the fees for
the chairperson of the Compensation Committee were increased to $2,000 per
quarter. The fees for the chairperson of the Nominating and Governance Committee
remain at $1,500 per quarter. Also effective as of fiscal 2005, the retainer for
each Director serving on the Company's Audit Committee was increased to $10,500
per quarter, and the retainer for the Company's non-management Presiding
Director, currently Mr. McCoy, was increased to $12,500 per quarter. In addition
to regular compensation paid to the chairpersons of each Committee, the members
of the Audit Committee and the Presiding Director, Directors may receive
additional compensation for the performance of duties assigned by the Board or
its committees that are considered beyond the scope of the ordinary
responsibilities of Directors or committee members. Directors may elect to defer
payment of their fees into the Company's Directors Deferred Compensation Plan,
one of the investment alternatives for which is a Company Common Shares Fund.
The Company also reimburses Directors for out-of-pocket travel expenses incurred
in connection with attendance at Board and committee meetings.
24
Directors receive an annual option grant to purchase Common Shares with an
aggregate exercise price of $300,000. Each Director also receives, upon first
appointment or election to the Board, an option grant to purchase Common Shares
with an aggregate exercise price of $300,000. The exercise price per share of
these options is the fair market value of a Common Share on the date of grant.
The actual value of the options will be the difference between the market value
of the underlying Common Shares on the exercise date and the exercise price. In
determining the value of the Director options and, thus, the total compensation
to Directors, the Board of Directors made certain assumptions about the future
increase in the market value of the Company's Common Shares over the term of the
options. The options are granted pursuant to the Company's Equity Incentive Plan
and Outside Directors Equity Incentive Plan. All grants to Directors generally
vest immediately and are exercisable for 10 years from the date of grant.
Options granted to Directors are treated as nonqualified options under the Code.
On November 17, 2003, Messrs. Bing, Conrades, Finn, Gerbig, Havens, Losh, McCoy,
Notebaert, O'Halleran, Raisbeck and M. Walter and Dr. Spaulding each were
granted options to purchase 5,084 Common Shares (having an aggregate exercise
price of $300,000) in accordance with the provisions of the Equity Incentive
Plan and the Outside Directors Equity Incentive Plan. Mr. R. Walter does not
receive any of the compensation described in this paragraph or the preceding
paragraph. Since his appointment on July 26, 2004 as Chief Financial Officer on
an interim basis, Mr. Losh has not received, and does not currently receive, any
of the compensation described in this paragraph or the preceding paragraph.
EQUITY COMPENSATION PLAN INFORMATION
Certain equity compensation plans are subject to shareholder approval
while other plans have been authorized solely by the Board of Directors. The
following is a description of the Company's plans that have not been approved by
shareholders.
Broadly-based Equity Incentive Plan
The Company's Broadly-based Equity Incentive Plan was adopted by the Board
effective November 15, 1999 and further amended pursuant to resolutions of the
Board adopted on August 8, 2001. The plan provides for grants in the form of
nonqualified stock options, restricted shares and restricted share units to
employees of the Company. The aggregate number of Common Shares authorized for
issuance pursuant to the plan is 36 million with generally no more than 10% of
the authorized amount issuable in the form of restricted shares and restricted
share units having a restriction period of less than three years. The plan is
not intended to qualify under Section 401(a) of the Code and is not subject to
any of the provisions of the Employee Retirement Income Security Act ("ERISA").
Outside Directors Equity Incentive Plan
The Company's Outside Directors Equity Incentive Plan was adopted by the
Board effective May 10, 2000. The plan reserves and makes available for
distribution an aggregate of 1.5 million Common Shares for grants in the form of
nonqualified stock options and restricted shares to members of the Board who are
not employees of the Company. The plan is not intended to qualify under Section
401(a) of the Code and is not subject to any of the provisions of ERISA.
Deferred Compensation Plan, as amended
The Company's Deferred Compensation Plan, as amended (the "Deferred
Compensation Plan"), was adopted by the Board effective April 7, 1994, and has
been subsequently amended several times since then, most recently on May 25,
2004. The plan permits certain management employees of the Company to defer
salary, bonus and long-term incentive plan payments into one of several
investment alternatives, including a stock equivalent account. In addition, the
Company may, in its discretion, make additional matching or fixed contributions
to the deferred balances of participating management employees. Deferrals into
the stock equivalent account are valued as if each deferral were invested in the
Company's Common Shares as of the deferral date. Deferred balances are paid out
upon retirement, termination from employment, death or disability. The maximum
aggregate number of Common Shares that can be credited to stock equivalent
accounts pursuant to the plan is 2.25 million. Deferred balances are paid in
cash or in Common Shares in kind with any fractional shares paid in cash. The
plan contains a
25
dividend reinvestment feature for the stock equivalent account with dividends
generally being reinvested in investment options other than the stock equivalent
account for reporting persons under Section 16 of the Exchange Act. The plan is
not intended to qualify under Section 401(a) of the Code and is exempt from many
of the provisions of ERISA as a "top hat" plan for a select group of management
or highly compensated employees.
Directors Deferred Compensation Plan, as amended and restated
The Company's Directors Deferred Compensation Plan, as amended and
restated (the "Directors Deferred Compensation Plan"), was adopted by the Board
effective August 11, 1999, and was recently amended and restated. The plan
permits directors of the Company to defer board fees into one of several
investment alternatives, including a stock equivalent account. Deferrals into
the stock equivalent account are valued as if each deferral were invested in the
Company's Common Shares as of the deferral date. Deferred balances are paid upon
retirement or other termination from board service, death or disability. The
maximum aggregate number of Common Shares that can be credited to stock
equivalent accounts pursuant to the plan is 90,000. Deferred balances are paid
in cash, or in Common Shares in kind to the extent so invested, with any
fractional shares paid in cash. The plan contains a dividend reinvestment
feature for the stock equivalent account with dividends generally being
reinvested in investment options other than the stock equivalent account. The
plan is not intended to qualify under Section 401(a) of the Code and is not
subject to any of the provisions of ERISA.
Global Employee Stock Purchase Plan
The Company's Global Employee Stock Purchase Plan was adopted by the Board
effective August 11, 1999. The plan permits the Company's international
employees to purchase Common Shares through payroll deductions. The total number
of Common Shares made available for purchase under the plan is 4.5 million.
International employees who have been employed by the Company for at least 30
days are eligible to contribute from 1% to 15% of eligible compensation. The
purchase price is determined by the lower of 85% of the closing market price on
the first day of the offering period or 85% of the closing market price on the
last day of the offering period. During any given calendar year, there are two
offering periods: January 1 - June 30; and July 1 - December 31. The plan is not
intended to qualify under Section 401(a) of the Code and is not subject to any
of the provisions of ERISA.
26
The following table summarizes information relating to the Company's
equity compensation plans at June 30, 2004:
Outstanding
-------------------------------------
Number of Common Weighted
Shares to be Issued Average Common Shares
Upon Exercise of Exercise Price Available for
Outstanding Options per Common Future Issuance
(in millions) Share (in millions)
------------------------ ------------------- -------------- ---------------
Plans approved by
shareholders (1) 11.8(2) $52.31(2) 22.6(3)
Plans not approved by
shareholders 25.1(4) $62.01(4) 14.0(5)
Plans acquired through
acquisition (6) 5.8(6) $31.63 --
---- ------ ----
Balance at June 30, 2004 42.8 $55.52 36.6
==== ====== ====
(1) Under the Company's Equity Incentive Plan, which was approved by the
Company's shareholders in November 1995, the total number of Common Shares
available for grant of awards under the plan is an amount equal to the sum
of (a) 1.5% of the total outstanding Common Shares as of the last day of
the Company's immediately preceding fiscal year, plus (b) the number of
Common Shares available for grant under the plan as of November 23, 1998,
plus (c) any Common Shares related to awards that expire or are
unexercised, forfeited, terminated, cancelled, settled in such a manner
that all or some of the Common Shares covered by an award are not issued
to a participant, or returned to the Company in payment of the exercise
price or tax withholding obligations in connection with outstanding
awards, plus (d) any unused portion of the Common Shares available under
clause (a) above for the previous two fiscal years as a result of not
being used in such previous two fiscal years.
(2) In addition to stock options outstanding under the Company's Equity
Incentive Plan, also includes 430,302 restricted share units outstanding
under the Equity Incentive Plan that are payable solely in Common Shares.
Restricted share units do not have an exercise price, and therefore were
not included for purposes of computing the weighted-average exercise
price.
(3) Includes approximately 4.2 million Common Shares available for issuance
under the Company's Employee Stock Purchase Plan.
(4) In addition to stock options outstanding under the Company's Broadly-based
Equity Incentive Plan and Outside Director Equity Incentive Plan, also
includes 10,000 restricted share units outstanding under the Company's
Broadly-based Equity Incentive Plan that are payable solely in Common
Shares. Also includes 22,564 and 4,076 Common Share units, respectively,
outstanding under the Company's Directors Deferred Compensation Plan and
Deferred Compensation Plan that are payable solely in Common Shares. These
awards do not have an exercise price, and therefore were not included for
purposes of computing the weighted-average exercise price.
(5) Includes approximately 4.3 million Common Shares available for issuance
under the Company's Global Employee Stock Purchase Plan.
(6) Includes options to purchase approximately 3.4 million Common Shares in
the aggregate that were assumed by the Company in connection with
acquisitions that were approved by the Company's shareholders. The
remaining options to purchase approximately 2.4 million Common Shares in
the aggregate were assumed by the Company in connection with acquisitions
that were not approved by the Company's shareholders.
27
AUDIT COMMITTEE REPORT
The Audit Committee currently consists of six members of the Company's
Board of Directors, each of whom the Board of Directors has determined is
independent, as defined by the rules of the New York Stock Exchange. The Audit
Committee's activities are governed by a written charter, which specifies the
scope of the committee's responsibilities and how it carries out those
responsibilities. A copy of the charter, which was approved in its current form
by the Board on August 3, 2004, is attached to this Proxy Statement as Appendix
A.
The Audit Committee has reviewed and discussed the audited financial
statements for fiscal 2004 (the "Fiscal 2004 Audited Financial Statements") with
Company management and with Ernst & Young LLP ("Ernst & Young"), the Company's
independent accountants. The Audit Committee also has discussed with Ernst &
Young the matters required to be discussed by Statement on Auditing Standards
No. 61 (Communication with Audit Committees), as amended by Statement on
Auditing Standards No. 90 (Audit Committee Communications). The Audit Committee
also received from Ernst & Young the written disclosures and the letter required
by Independence Standards Board Standard No. 1 (Independence Discussions with
Audit Committees) and has discussed with Ernst & Young its independence from the
Company. The Audit Committee also has considered whether the provision of
non-audit services to the Company is compatible with the independence of Ernst &
Young.
Based on the review and discussions referred to above, and relying
thereon, the Audit Committee recommended to the Board of Directors that the
Fiscal 2004 Audited Financial Statements be included in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2004 filed with the SEC.
In making such recommendation, the Audit Committee took into account those
matters considered as part of its internal review commenced in April 2004 that
is ongoing, which is described in Notes 1 and 2 to the Fiscal 2004 Audited
Financial Statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2004, as well as those matters described in Item
9a of such Annual Report on Form 10-K.
Submitted by the Audit Committee of the Board.
October 24, 2004 John F. Finn, Chairman
Dave Bing
George H. Conrades
Robert L. Gerbig
Michael D. O'Halleran
David W. Raisbeck
28
SELECTION OF INDEPENDENT ACCOUNTANTS
Audit Fees. Audit fees include fees paid by the Company to Ernst & Young
related to the annual audit of the Company's consolidated financial statements,
the review of financial statements included in the Company's Quarterly Reports
on Form 10-Q, statutory audits of various international subsidiaries, and
additional procedures implemented as a result of the Audit Committee's internal
review commenced in April 2004 that is ongoing. Audit fees also include fees for
services performed by Ernst & Young that are closely related to the audit and in
many cases could only be provided by the Company's independent accountant, such
as comfort letters and consents related to SEC registration statements. The
aggregate fees billed to the Company by Ernst & Young for audit services
rendered to the Company and its subsidiaries for the fiscal year ended June 30,
2003 ("fiscal 2003") and fiscal 2004 totaled $3,797,895 and $8,015,584,
respectively.
Audit-Related Fees. Audit-related services include due diligence services
related to mergers and acquisitions, audit-related research and assistance,
document production and employee benefit plan audits. The aggregate fees billed
to the Company by Ernst & Young for audit-related services rendered to the
Company and its subsidiaries for fiscal 2003 and fiscal 2004 totaled $3,193,960
and $2,927,687, respectively.
Tax Fees. Tax fees include tax compliance and other tax-related services.
The aggregate fees billed to the Company by Ernst & Young for tax services
rendered to the Company and its subsidiaries for fiscal 2003 and fiscal 2004
totaled $1,916,880 and $2,053,411, respectively.
All Other Fees. The aggregate fees billed to the Company by Ernst & Young
for all other services rendered to the Company and its subsidiaries for fiscal
2003 and fiscal 2004 totaled $14,500 and $289,986, respectively.
AUDIT COMMITTEE AUDIT AND NON-AUDIT SERVICES PRE-APPROVAL POLICY
Under the Sarbanes-Oxley Act of 2002 (the "Act"), the Audit Committee is
responsible for the appointment, compensation and oversight of the work of the
independent accountants. As part of this responsibility, the Audit Committee is
required to pre-approve the audit and permissible non-audit services performed
by the independent accountants in order to assure that such services do not
impair the accountants' independence from the Company. To implement these
provisions of the Act, the SEC has issued rules specifying the types of services
that independent accountants may not provide to their audit client, as well as
the audit committee's administration of the engagement of the independent
accountants. Accordingly, the Audit Committee has adopted an Audit and Non-Audit
Services Pre-Approval Policy (the "Policy") which sets forth the procedures and
the conditions under which services proposed to be performed by the independent
accountants must be pre-approved.
Pursuant to the Policy, certain proposed services may be pre-approved on a
periodic basis so long as the services do not exceed certain pre-determined cost
levels. If not pre-approved on a periodic basis, proposed services must
otherwise be separately pre-approved prior to being performed by the independent
accountant. In addition, any proposed services that were pre-approved on a
periodic basis but later exceed the pre-determined cost level would require
separate pre-approval of the incremental amounts by the Audit Committee.
The Audit Committee has delegated pre-approval authority to the Chairman
of the Audit Committee for proposed services to be performed by the independent
accountants for up to $500,000. Pursuant to such Policy, in the event the
Chairman pre-approves services, the Chairman is required to report decisions to
the full Audit Committee at its next regularly-scheduled meeting. Proposed
services equal to or exceeding $500,000 require full Audit Committee approval.
Representatives of Ernst & Young, which served as the Company's
independent public accountants for fiscal 2004 and which the Board has appointed
as the independent public accountants for fiscal 2005, are expected to be
present at the Annual Meeting. At the Annual Meeting representatives of Ernst &
Young will have the opportunity to make a statement about the Company's
financial condition, if they desire to do so, and to respond to appropriate
questions from shareholders.
29
PROPOSAL 1 - ELECTION OF NOMINEES FOR DIRECTORS OF THE COMPANY
AT THE ANNUAL MEETING
The Company's Board of Directors has nominated each of George H. Conrades,
Robert L. Gerbig and Richard C. Notebaert to serve as a Director of the Company
for a term of three years and until his successor is duly elected and qualified.
Each of Messrs. Conrades, Gerbig and Notebaert currently serves as a Director of
the Company.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THESE NOMINEES TO
SERVE AS MORE FULLY DESCRIBED UNDER "ELECTION OF DIRECTORS" IN THIS PROXY
STATEMENT.
PROPOSAL 2 - AMENDMENT OF THE COMPANY'S PERFORMANCE-BASED INCENTIVE
COMPENSATION PLAN AND APPROVAL OF THE MATERIAL TERMS OF THE PLAN, AS
AMENDED
GENERAL
On August 14, 1996, the Company's Board of Directors adopted the Cardinal
Health, Inc. Performance-Based Incentive Compensation Plan (the "Plan"), and the
Company's shareholders approved the material terms of the performance goals
thereunder at the 1996 Annual Meeting of Shareholders. Subsequent amendments to
the Plan were adopted by the Board and approved by the Company's shareholders at
the 1998 Annual Meeting of Shareholders. The Company's shareholders re-approved
the material terms of the performance goals under the Plan, as amended, at the
2000 Annual Meeting of Shareholders.
In August 2004, the Board approved additional amendments to the Plan
(including renaming the Plan, as amended, the "Cardinal Health Management
Incentive Plan"), and directed that the Plan, as amended, be submitted to the
Company's shareholders for approval. The amendments to the Plan will not be
effective absent shareholder approval. The Plan is designed so that awards
granted pursuant to the terms of the Plan would generally not be subject to the
tax deduction limits of Section 162(m) of the Code. Section 162(m) of the Code
generally limits a company's federal income tax deduction for compensation paid
to named executive officers to $1 million each, unless all amounts in excess of
$1 million qualify for an exception to the limit. One of the available
exceptions is for compensation that is paid under a performance-based
compensation plan that has been approved by shareholders.
The purpose of the Plan is to increase the Company's competitiveness in
attracting, retaining and motivating executives and to permit the Company to
provide incentive compensation that is tied to the achievement of
pre-established and objective performance goals that will exempt such
compensation from the tax deduction limits under Section 162(m) of the Code, as
described further below. The Plan is also designed to allow the Company to carry
out its obligations under employment and other arrangements with certain
executive officers of the Company in a tax-efficient manner.
Notwithstanding any failure to receive shareholder approval of the
amendments, the Compensation Committee retains the authority to make
performance-based awards to the Company's executives outside of the Plan, in
such amounts and at such times as it determines in its sole discretion.
The following is a summary of the material terms of the Plan, as amended,
including the material terms of the performance goals thereunder that
shareholders are being asked to approve. The Plan, as amended, is set forth as
Appendix B to this Proxy Statement.
30
DESCRIPTION OF THE AMENDMENTS
As more fully described in the "Human Resources and Compensation Committee
Report" in this Proxy Statement, the Company's Board of Directors has endorsed
an executive compensation philosophy that differentiates compensation results
based upon corporate, business unit and individual performance and that rewards
Company executives with incentive compensation at or above competitive levels if
performance is superior. In order to implement this philosophy without
jeopardizing the tax deduction for payments of incentive compensation under
Section 162(m) of the Code, and in order to link a greater amount of executives'
pay to the Company's performance, the Board has determined that the maximum
award payable to any individual for any single fiscal year under the Plan should
be increased to $7.5 million from the $3.0 million limit under the Plan as it
currently exists. The Board considers this proposed change necessary to permit
the Company to attract, retain and compensate senior executive talent in a
tax-efficient manner as the Company continues to grow. The proposed change will
give the Board the ability to approve tax-deductible bonus payments in excess of
otherwise applicable target bonuses to reward achievement of outstanding
performance that substantially exceeds the goals established by the Compensation
Committee during a performance period. In addition, the proposed change is
designed to enable the Company to fulfill its contractual obligations to its
senior executives, including its obligations to Mr. Walter under the Walter
Employment Agreement, and in doing so, avoid triggering the tax deduction
limitation rules prescribed under Section 162(m) of the Code.
The original maximum award limit under the Plan was $1.0 million when the
Plan was first approved by shareholders in 1996. The maximum award was
subsequently increased to $3.0 million in 1998, and was approved by
shareholders. The limit has remained at $3.0 million for the last six years. An
increase of the limit to $7.5 million would enable the Company to pay such an
amount under a plan complying with the tax deduction rules of Section 162(m).
It is important to note that under the Plan, the Compensation Committee
will evaluate the extent to which performance goals are satisfied during a
particular performance period in determining the amounts, if any, to be awarded
under the Plan. The Compensation Committee takes this responsibility seriously.
For example, although the Company met or exceeded certain of its financial goals
for fiscal 2004, including its operating cash flow targets, the Company did not
meet certain other financial goals. As a result, the Compensation Committee
determined that no bonus awards would be made to executive officers for fiscal
2004.
Other proposed amendments to the Plan include expanding the potential
performance measures that performance goals under the Plan may be based upon and
changing the name to the "Cardinal Health Management Incentive Plan." Under the
Plan as it currently exists, the performance goals for awards are based upon the
achievement of targeted measures of return on equity, earnings per share,
earnings from operations, and/or such other objective business criteria as the
Company's shareholders may approve from time to time. Under the Plan, as
amended, as described below, the potential performance measures are being
substantially expanded to provide the Compensation Committee the flexibility to
set performance goals that can be modified in line with changes to the Company's
business environment. Non-financial metrics are also being added.
DESCRIPTION OF THE PLAN
Administration. The Plan is administered by the Compensation Committee.
Among other things, the Compensation Committee has the authority to select
participants in the Plan from among the Company's executive officers and to
determine the performance goals, target amounts and other terms and conditions
of awards under the Plan. The Compensation Committee also has the authority to
establish and amend rules and regulations relating to the Plan and to make all
other determinations necessary and advisable for the administration of the Plan.
All decisions made by the Compensation Committee pursuant to the Plan are made
in the Compensation Committee's sole discretion and are final and binding.
Eligibility. Executive officers of the Company designated by the
Compensation Committee are eligible to be granted awards under the Plan.
Currently, the Company has 12 executive officers, who are listed annually in the
Company's Annual Report on Form 10-K filed with the SEC. Although the tax laws
limit deductibility only for compensation paid to the five most highly
compensated executive officers, the performance goals are applied to all
executive officers in the event that one or more should become subject to the
limits of Section 162(m) of the Code.
31
Terms of Awards. Awards under the Plan consist of cash amounts payable
upon the achievement, during a specified performance period, of specified
objective performance goals. A performance period is set by the Compensation
Committee, but may not extend beyond the end of the fiscal year with respect to
which the attainment of performance goal(s) relating to the award will be
determined. At the beginning of a performance period for a given award, the
Compensation Committee will establish the performance goal(s) and the target
amount of the award, which will be earned if the performance goal(s) are
achieved in full, together with any lesser amount that will be earned if the
performance goal(s) are only partially achieved. After the end of the
performance period, the Compensation Committee will certify the extent to which
the performance goals are achieved and determine the amount of the award that is
payable, provided that the Committee will have the discretion to reduce (but not
increase) the amount of incentive compensation actually paid.
Performance Goals. The performance goals for awards are based upon the
achievement of targeted measures stated in the Plan. Under the Plan, as amended,
the performance goals for awards may be based upon targeted measures of (i) cash
flow; (ii) earnings (including gross margin, earnings before interest and taxes,
earnings before taxes and net earnings); (iii) earnings per share; (iv) growth
in earnings or earnings per share; (v) stock price; (vi) return on equity or
average shareholders' equity; (vii) total shareholder return; (viii) return on
capital; (ix) return on assets or net assets; (x) return on investment; (xi)
revenue; (xii) income or net income; (xiii) operating income or net operating
income; (xiv) operating profit or net operating profit (whether before or after
taxes); (xv) operating margin; (xvi) return on operating revenue; (xvii) market
share; (xviii) contract awards or backlog; (xix) overhead or other expense
reduction; (xx) growth in shareholder value relative to the moving average of
the S&P 500 Index or a peer group index; (xxi) credit rating; (xxii) strategic
plan development and implementation; (xxiii) improvement in workforce diversity;
(xxiv) customer satisfaction; (xxv) employee satisfaction; (xxvi) management
succession plan development and implementation; and (xxvii) employee retention.
Maximum Award Payable and Not Subject to Deduction Limitation Rules of
Section 162(m) of the Code. Under the Plan, as amended, the maximum award that
could be paid to a participant for any performance period (which may not exceed
a single fiscal year) would be $7.5 million, with such maximum award amount to
be prorated if the performance period is less than a full fiscal year.
Termination of Employment. A participant whose employment terminates
because of death or disability during the performance period for an award will
receive a prorated portion of the award, based upon the extent to which the
performance goals had been achieved before such termination, unless the
Compensation Committee determines otherwise. A participant whose employment
terminates for any other reason before the end of the performance period for an
award will not be entitled to any payment with respect to the award.
Amendment and Discontinuance. The Plan may be amended, modified or
terminated by the Compensation Committee at any time, but no such amendment,
modification or termination will affect the payment of any award for a
performance period that has already ended or increase the amount of any award.
REASON FOR SHAREHOLDER APPROVAL
The rules pertaining to Section 162(m) of the Code require shareholder
approval of material terms of the performance goals under a plan under which
qualified performance-based compensation is paid by a company. Such material
terms are required to be re-approved in the future by shareholders at least once
every five years when, as with respect to the Plan, the Compensation Committee
has the ability to change the targets under a performance goal after shareholder
approval of the goal.
32
VOTE REQUIRED
Under applicable law, the affirmative vote of the holders of a majority of
the Common Shares entitled to vote on this matter and present or represented by
proxy at the Annual Meeting will be required for approval of this proposal.
Abstentions will have the same effect as votes against the proposal. Broker
non-votes are not considered votes cast on this matter and therefore will have
no effect on this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
PROPOSAL 3 - PROPOSAL FROM SHAREHOLDER ON ANNUAL ELECTION OF DIRECTORS
The Company has received a proposal from a shareholder (the "Shareholder
Proposal") which is required to be included in this Proxy Statement. The Company
is advised that the proposal will be presented for action at the Annual Meeting.
The proposed resolution and its supporting statement, for which the Board of
Directors and the Company accept no responsibility, are presented below. The
proposal has been submitted by the American Federation of State, County and
Municipal Employees Employees Pension Plan, 1625 L Street, N.W., Washington,
D.C. 20036 (the owner of 4,423 Common Shares as of June 7, 2004).
The Shareholder Proposal and the supporting statement of the shareholder
submitting the Shareholder Proposal read as follows:
"RESOLVED, that the shareholders of Cardinal Health Inc. ("Cardinal
Health" or the "Company") urge the board of directors to take the
necessary steps to eliminate the classification of the board of directors
of the Company and to require that all directors stand for election
annually. The board declassification should be completed in a manner that
does not affect the unexpired terms of directors.
SUPPORTING STATEMENT
We believe the election of directors is the most powerful way shareholders
influence the strategic direction of our Company. Currently, the board is
divided into three classes and each class serves staggered three-year
terms. Because of this structure, shareholders may only vote on roughly
one third of the directors each year.
In our opinion, the classified structure of the board is not in
shareholders' best interest because it reduces accountability to
shareholders. Annual election of directors gives shareholders the power to
completely replace their board, or replace a majority of directors, if a
situation arises warranting such drastic action. We do not believe
destaggering the board will destabilize our Company or affect the
continuity of director service. Our directors, as well as the directors of
the majority of other public companies, are routinely elected with over
90% shareholder approval.
A 2001 study found that firms with the strongest shareholder rights
significantly outperform companies with weaker shareholder rights and
outperform the broader market. The study of 1,500 firms by researchers at
Harvard and the University of Pennsylvania's Wharton School found a
significant positive relationship between greater shareholder rights, as
measured by a governance index, and both firm valuation and performance
from 1990 to 1999. The governance index took into account, among other
things, whether a company had a classified board.
A 2002 Harvard study provides evidence that classified boards harm
shareholders. The study, which included all hostile bids from 1996 through
2000, found that an "effective staggered board" -- one that cannot be
dismantled by a hostile bidder without first winning control of the board
-- doubles the odds that a target company will remain independent, without
providing any countervailing benefit such as a higher acquisition premium.
The study estimated that effective staggered boards cost target
shareholders $8.3 billion during that period.
The classification of Cardinal Health's board is effected in its Code of
Regulations. The Regulations make it extremely difficult for shareholders
to declassify the board unilaterally because approval by holders of
33
75% of outstanding shares is required to amend the classification
provision. Accordingly, we urge Cardinal Health's board to approve
amendments to the Regulations necessary to declassify the board and submit
those changes for shareholder approval, with the board's recommendation in
favor of the amendments, at the 2005 annual meeting of shareholders.
A growing number of shareholders appear to agree with our concerns. Last
year a majority of shareholders supported proposals seeking board
declassification at 34 companies (source: Council of Institutional
Investors). Among these companies, Safeway, Cendant, and Merck each
supported declassification amendments in 2004.
We urge shareholders to vote for this proposal."
BOARD OF DIRECTORS STATEMENT IN OPPOSITION TO SHAREHOLDER PROPOSAL
The Board of Directors believes that the Shareholder Proposal to abolish
the current classified board structure and elect the entire Board of Directors
annually is not in the best interests of the Company or its shareholders and
recommends a vote AGAINST the Shareholder Proposal.
The current classified board structure has been in place since it was
approved by the shareholders in 1983. Under our Code of Regulations, the Board
of Directors is divided into three classes with Directors elected to staggered
three-year terms. Approximately one-third of the Directors stand for election
each year, and the entire Board can be replaced in the course of three annual
meetings, all held within approximately two years. The Board of Directors
believes that an active, professional board benefits in many ways from
classifying its directors. The Board believes that the most notable among these
benefits are increased stability, improved long-term planning and enhanced
ability to resist unfair and abusive takeover tactics.
INCREASED STABILITY. The three-year staggered terms are designed to
provide stability and ensure that, at any given time, a majority of the
Company's Directors have prior experience as Directors of the Company and solid
knowledge of the Company's complex business and strategy. The Board of Directors
believes that Directors who have experience with the Company and knowledge about
its business and affairs are a valuable resource and are better positioned to
make fundamental decisions that are in the best interests of the Company and its
shareholders. The Board observes that numerous well-respected U.S. corporations
and institutional investors have classified boards, including approximately 60%
of the S&P 500 companies.
IMPROVED LONG-TERM PLANNING. The Board of Directors believes that electing
directors to staggered three-year terms enhances a company's ability to engage
in long-term strategic planning. It also believes that the continuity made
possible by the classified board structure is essential to the proper oversight
of a company like ours that has multiple lines of business in a rapidly-changing
industry.
The Board of Directors believes that the benefits of the current
classified board structure do not come at the cost of Directors' accountability
to shareholders and that Directors elected to three-year terms are just as
accountable to shareholders as Directors elected annually, since all Directors
are required to uphold their fiduciary duties to the Company and its
shareholders, regardless of the length of their term of office. In our view, the
annual election of approximately one-third of the Directors provides
shareholders with an orderly means to effect change and communicate their views
on the performance of the Company and its Directors.
ENHANCED ABILITY TO RESIST UNFAIR AND ABUSIVE TAKEOVER TACTICS. A major
purpose of a classified board structure is to enhance the Board of Directors'
ability to negotiate the best results for shareholders in a potential takeover
situation. The Board of Directors believes that a classified board structure
encourages a person seeking to obtain control of the Company to negotiate with
the Board. At least two annual meetings will be required to effect a change in
control of the Board. This gives the incumbent Directors additional time and
leverage to evaluate the adequacy and fairness of any takeover proposal,
negotiate on behalf of all shareholders and weigh alternative methods of
maximizing shareholder value for all shareholders. It is important to note,
however, that although the classified board is intended to cause a person
seeking to obtain control of the Company to negotiate with the Board, the
existence of a classified board will not, in fact, prevent a person from
acquiring control of a board or accomplishing a hostile acquisition.
34
Adoption of the Shareholder Proposal would not automatically eliminate the
classified board structure. Further action by the shareholders would be required
to amend our Code of Regulations. Under our Code of Regulations, a 75% vote of
the shares having voting power with respect to the proposal would be required
for approval. While the Board would consider such an amendment, it would do so
consistent with its fiduciary duty to act in a manner it believes to be in the
best interest of the Company and all of its shareholders.
This is the first instance that the Company has received a shareholder
proposal regarding annual election of Directors. The Board of Directors and its
Nominating and Governance Committee, with the assistance of their professional
advisors, have carefully considered this proposal and the arguments for and
against a classified board structure. The Board has concluded that the Company's
classified board structure continues to promote the best interests of the
shareholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE AGAINST THE
SHAREHOLDER PROPOSAL.
VOTE REQUIRED
Approval of the Shareholder Proposal requires the affirmative approval of
the holders of a majority of the Common Shares present in person, or by proxy,
at the Annual Meeting and entitled to vote on the Shareholder Proposal.
Abstentions will have the same effect as votes against the proposal. Broker
non-votes will not be considered Common Shares present and entitled to vote on
the Shareholder Proposal and will not have a positive or negative effect on the
outcome of this proposal.
FUTURE SHAREHOLDER PROPOSALS
Any shareholder who intends to present a proposal for inclusion in the
proxy statement and form of proxy relating to the Company's 2005 Annual Meeting
of Shareholders is advised that the proposal must be received by the Company at
its principal executive offices not later than July 11, 2005. The Company will
not be required to include in its proxy statement or form of proxy a shareholder
proposal which is received after that date or which otherwise fails to meet the
requirements for shareholder proposals established by SEC regulations.
In addition, if a shareholder intends to present a proposal at the
Company's 2005 Annual Meeting of Shareholders without the inclusion of that
proposal in the Company's proxy materials and written notice of the proposal is
not received by the Company on or before September 24, 2005, or if the Company
meets other requirements of the SEC rules, proxies solicited by the Board of
Directors for the 2005 Annual Meeting of Shareholders will confer discretionary
authority to vote on the proposal at the meeting.
OTHER MATTERS
This solicitation of proxies is made by and on behalf of the Board of
Directors. The cost of the solicitation will be borne by the Company. In
addition to solicitation by mail, proxies may be solicited by Directors,
officers and employees of the Company in person or by telephone, telegraph or
other means of communication. These persons will receive no additional
compensation for solicitation of proxies but may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation. The Company has
retained MacKenzie Partners, Inc. at an estimated cost of $10,000, plus
reimbursement of expenses, to assist in its solicitation of proxies from
brokers, nominees, institutions and individuals. Arrangements also will be made
by the Company with custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and the Company will reimburse these
persons for reasonable expenses incurred in connection therewith.
If you and other residents at your mailing address own Common Shares in
street name, your broker or bank may have sent you a notice that your household
will receive only one annual report and proxy statement unless contrary to your
instructions. This practice is known as "householding," and is designed to
reduce the Company's printing and postage costs. However, if any shareholder
residing at such an address wishes to receive a separate annual report or proxy
statement, he or she may write to the Company's Investor Relations department at
the
35
Company's corporate office, or call the Investor Relations Line at (614)
757-5222. The Company will promptly deliver a separate copy (free of charge)
upon request.
If the enclosed proxy is executed and returned, or a proxy is voted by
telephone or the Internet, the Common Shares represented thereby will be voted
in accordance with any specifications made by the shareholder. Proxies returned
without specifications made by the shareholder will be voted to elect three
Directors as set forth under "Election of Directors" above, in favor of Proposal
2 and against Proposal 3.
The presence of any shareholder at the Annual Meeting will not operate to
revoke his or her proxy. A proxy may be revoked at any time insofar as it has
not been exercised by giving written notice to the Company or in open meeting or
by executing and forwarding a later-dated proxy to the Company or voting a later
proxy by telephone or the Internet.
If any other matters shall properly come before the Annual Meeting, the
persons named in the proxy, or their substitutes, will determine how to vote
thereon in accordance with their judgment and fiduciary responsibilities. The
Board of Directors does not know of any other matters which will be presented
for action at the Annual Meeting.
By Order of the Board of Directors.
/s/ PAUL S. WILLIAMS
November 8, 2004. PAUL S. WILLIAMS, Secretary
36
APPENDIX A
CARDINAL HEALTH, INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
I. PURPOSE
The primary function of the Audit Committee (the "Committee") is to
represent and assist the Board of Directors of Cardinal Health, Inc. (the
"Company") in fulfilling its oversight responsibilities with respect to:
(1) the integrity of the Company's financial statements;
(2) legal and code of ethics compliance;
(3) regulatory compliance;
(4) the qualifications, independence and performance of the Company's
independent auditor; and
(5) the qualifications and performance of the Company's internal auditing
function.
Consistent with this function, the Committee should encourage continuous
improvement of, and should foster adherence to, the Company's policies,
procedures and practices at all levels and should provide an open avenue of
communication among the independent auditor, financial and executive management,
the Corporate Audit Department, and the Board of Directors.
The Committee shall also be responsible for reviewing and approving
reports required by the Securities and Exchange Commission (the "Commission"),
e.g., "audit committee reports" and "selection of independent auditors" sections
in the Company's annual proxy statement to shareholders.
The Committee will primarily fulfill these responsibilities by carrying
out the specific activities enumerated in Section IV of this Charter. The
Committee is empowered to retain such advisors as it deems appropriate to assist
the Committee in fulfilling its responsibilities, and shall receive appropriate
funding from the Company, as determined by the Committee, to compensate such
advisors.
II. COMPOSITION
The Committee has been created by the Board of Directors pursuant to the
authority of Section 1701.63, Ohio Revised Code, and Article 2, Section 2.18 of
the Company's code of regulations.
The Committee shall be comprised of no fewer than three directors as
determined by the Board of Directors. The members of the Committee shall meet
the independence requirements applicable to directors and audit committee
members under the listing standards of the New York Stock Exchange. All members
of the Committee shall have a working familiarity with basic finance and
accounting practices. In addition, at least one Committee member shall be an
"audit committee financial expert" as determined by the Board in accordance with
Commission rules.
The members of the Committee shall be appointed by the Board of Directors
and serve until their successors shall be duly elected and qualified. Unless a
Chair is appointed by the Board of Directors, the members of the Committee may
designate a Chair by majority vote of the full Committee membership.
III. MEETINGS
The Committee shall meet at least four times annually or more frequently
as circumstances dictate, and minutes of such meetings shall be maintained. As
part of its job to foster open communication, the Committee shall meet
periodically with management, the senior Corporate Audit executive and the
independent auditor in separate executive sessions. The Committee may request
any officer or employee of the Company or the Company's outside counsel or
independent auditor to attend a meeting of the Committee or to meet with any
member of, or consultant to, the Committee. The Committee shall report regularly
to the full Board with respect to its activities.
A-1
IV. RESPONSIBILITIES AND DUTIES
Among its responsibilities and duties, the Audit Committee shall:
Financial Statement and Disclosure Matters
1. Review the Company's annual and quarterly financial statements prior
to filing with the Commission, including the independent auditor's
judgments about the quality and appropriateness of the Company's
accounting principles as applied in its financial reporting, and the
Company's disclosures under "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
2. Following completion of the annual audit, review separately with
each of management, the independent auditor and the Corporate Audit
Department any significant difficulties encountered during the
course of the audit, including any restrictions on the scope of the
work or access to required information.
3. Consider and approve, if appropriate, changes to the Company's
accounting principles and practices as suggested by the independent
auditor, management, or the Corporate Audit Department. and review
with the independent auditor, management or the Corporate Audit
Department, as appropriate, the extent to which changes or
improvements in financial or accounting practices, as approved by
the Committee, have been implemented.
4. Review and discuss quarterly information from the independent
auditor on:
(a) All critical accounting policies and practices used.
(b) All alternative treatments of financial information within
generally accepted accounting principles for material items that
have been discussed with management, ramifications of the use of
such alternative disclosures and treatments, and the treatment
preferred by the independent auditor.
(c) Other material written communications between the independent
auditor and management, such as any management letter or schedule of
unadjusted differences.
5. Discuss with management the announcement of financial results prior
to public release and the Company's practices with respect to
earnings press releases, including the use of "pro forma" or
"adjusted" non-GAAP information, and financial information and
earnings guidance provided to analysts and rating agencies.
6. Discuss with management and the independent auditor the effect of
proposed or pending regulatory and accounting requirements on the
Company's financial statements.
7. Review reports from management and the independent auditor regarding
the adequacy and effectiveness of, the Company's internal controls.
Review disclosures by the Company's CEO and CFO during their
certification process for the Form 10-K and Form 10-Q about any
significant deficiencies or material weaknesses in the design or
operation of internal controls or material weaknesses therein and
any fraud involving management or other employees who have a
significant role in the Company's internal controls. Review reports
from management regarding the adequacy and effectiveness of the
Company's disclosure controls and procedures.
8. Review and discuss with management (including the senior Corporate
Audit executive) and the independent auditor, when required, the
Company's internal control report and the independent auditor's
attestation of the report prior to the filing of the Company's Form
10-K.
Independent Auditor
9. Be directly responsible, in its capacity as a committee of the
Board, for the appointment, compensation, retention, and oversight
of the work of the independent auditor (including resolution of
disagreements between management and the independent auditor). The
Committee shall have the sole authority to appoint or replace the
independent auditor, which shall report directly to the Committee.
10. Obtain and review, at least annually, a report by the independent
auditor describing: (a) the independent auditor's internal
quality-control procedures; and (b) any material issues raised by
the most recent internal quality-control review, or peer review, or
by any inquiry or investigation by governmental or professional
authorities, within the preceding five years, respecting one or more
independent audits carried out by the independent auditor's firm,
and any steps taken to deal with any such issues.
11. Obtain and review, at least annually, a report by the independent
auditor describing any relationships between the auditor and the
Company or any other relationships that may adversely affect the
independence of the auditor. The Committee shall actively engage in
a dialogue with the independent auditor with respect to any
disclosed relationships or services that may impact the auditor's
objectivity and independence, and consider the independence of the
auditor.
12. Pre-approve all audit and permissible non-audit services to be
provided by the Company's independent auditor and their related
fees. The Committee has adopted an Audit and Non-Audit Services
Pre-Approval Policy which sets forth the procedures and the
conditions pursuant to which services proposed to be performed by
the independent auditor must be pre-approved.
13. Obtain from the independent auditor assurance that Section 10A(b) of
the 34 Act has not been implicated.
14. Recommend to the Board policies for the Company's hiring of
employees or former employees of the independent auditor who
participated in any capacity in the audit of the Company.
A-2
Corporate Audit Department
15. Review with management, the senior Corporate Audit executive and the
independent auditor activities, organizational structure,
qualifications and budget of the Corporate Audit Department.
16. Review with management and the independent auditor the appointment
and replacement of the senior Corporate Audit executive.
17. Annually approve the Corporate Audit Department's Audit Plan, and
review updates to the Audit Plan on an on-going basis. Review
summaries of reports to management prepared by the Corporate Audit
Department and management's responses.
Ethical, Legal and Other Compliance Activities
18. Review the Company's compliance procedures regarding its Ethics
Guide and management's systems to enforce the Ethics Guide.
19. Assess whether management has a review system in place that is
reasonably designed to satisfy the legal requirements with respect
to the Company's financial statements, reports and other financial
information disseminated to governmental organizations, and the
public.
20. Establish procedures for the receipt, retention and treatment of
complaints regarding accounting, internal accounting controls or
auditing matters, and the confidential, anonymous submission by
employees of concerns regarding ethical matters including a process
that allows for direct communication to the Audit Committee or their
designee of any such issues.
21. Review legal compliance matters with the Company's internal counsel,
including corporate securities trading policies and any legal matter
that could have a significant impact on the Company's financial
statements.
22. Discuss with management the Company's major financial risk exposures
and the steps management has taken to monitor and mitigate such
exposures, including the Company's financial risk assessment and
financial risk management policies.
23. Perform any other activities consistent with the Charter, the
Company's Code of Regulations and governing law, as the Committee
deems necessary or appropriate.
24. Review and update this Charter periodically, at least annually, as
conditions dictate. In conjunction with this update, the Committee
should perform an annual self-assessment of its processes and
communications with management, the independent auditor and the
Board of Directors.
Limitation of Audit Committee's Role
While the Committee has the responsibilities and powers set forth in this
Charter, the Committee will rely on management and the independent auditor to
plan or conduct audits and to determine that the Company's financial statements
and disclosures are complete and accurate and are in accordance with generally
accepted accounting principles and applicable rules and regulations.
Revised: August 4, 2004
A-3
APPENDIX B
CARDINAL HEALTH, INC.
MANAGEMENT INCENTIVE PLAN
1. PURPOSE. The purpose of the Cardinal Health, Inc. Management Incentive
Plan (the "Plan") is to advance the interests of Cardinal Health, Inc. and its
shareholders by providing certain of its key executives with incentive
compensation which is tied to the achievement of pre-established and objective
performance goals. The Plan is intended to provide participants with incentive
compensation which is not subject to the deduction limitation rules prescribed
under Section 162(m) of the Internal Revenue Code of 1986, as amended from time
to time (the "Code"), and should be construed to the extent possible as
providing for remuneration which is performance-based compensation within the
meaning of Section 162(m) of the Code and the regulations promulgated
thereunder. The Plan, formerly known as the Performance - Based Incentive
Compensation Plan, was amended on August 4, 2004.
2. DEFINITIONS. Whenever used herein, the following terms shall have their
respective meanings set forth below:
a. "Award" means the amount payable to a Participant in accordance with
Section 6 of the Plan.
b. "Committee" means the Human Resources and Compensation Committee
(the "Committee") of the Board of Directors of Cardinal Health, Inc. The
Committee shall be comprised of two or more "outside directors" as that term is
defined in Section 162(m) of the Code and the regulations promulgated
thereunder, as amended from time to time.
c. "Company" means Cardinal Health, Inc. and its subsidiaries.
d. "Effective Date" means the date set forth in Section 9(a) of the
Plan.
e. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
f. "Participant" means an individual eligible to participate hereunder,
as determined by the Committee, each of whom shall be an executive officer of
the Company.
g. "Performance Period" means any time period established by the
Committee, but in no event including any period beyond the end of the fiscal
year with respect to which the attainment of Performance Goal(s) relating to an
Award will be determined.
h. "Performance Goal" means any performance goal determined by the
Committee in accordance with Section 5 of the Plan.
i. "Target Award" means the amount of any Award as established by the
Committee that would be payable to a Participant for any Performance Period if
the Performance Goals for the Performance Period were fully (100%) achieved and
no negative discretion was exercised by the Committee in regard to that Award
pursuant to the last sentence of Section 6.
3. ADMINISTRATION. The Plan shall be administered by the Committee. Subject
to the provisions of the Plan, the Committee will have full authority to
interpret the Plan, to establish and amend rules and regulations relating to it,
to determine the terms and provisions for making Awards and to make all other
determinations necessary or advisable for the administration of the Plan. All
decisions made by the Committee pursuant to the provisions hereof shall be made
in the Committee's sole discretion and shall be final and binding on all
persons.
4. ELIGIBILITY. The Committee shall designate the Participants eligible to
receive Awards for each Performance Period and establish the Performance Goals
applicable to each Participant for each Performance Period. An individual who
becomes eligible to participate in the Plan during the Performance Period may be
approved by the Committee for a partial period of participation. In such case,
the Participant's Target Award and
B-1
Award will be based upon performance during the portion of the Performance
Period during which the Participant participates in the Plan, and the amount of
the Target Award will be pro-rated based on the percentage of time the
Participant participates in the Plan during the Performance Period.
5. ESTABLISHMENT OF TARGET AWARDS, PERFORMANCE PERIODS AND PERFORMANCE GOALS.
For each Performance Period established by the Committee, the Committee shall
establish a Target Award for each Participant. Awards shall be earned based upon
the financial performance of the Company or one or more operating groups of the
Company during a Performance Period; provided, however, the maximum Award that
may be paid to any single Participant for any Performance Period is $7,500,000,
such maximum Award amount to be pro-rated if the Performance Period is less than
a full fiscal year. As to each Performance Period, within such time as
established by Section 162(m) of the Code, the Committee will establish in
writing Performance Goals based on one or more of the following performance
measures of the Company (and/or one or more operating groups of the Company, if
applicable) over the Performance Period: (i) cash flow; (ii) earnings (including
gross margin, earnings before interest and taxes, earnings before taxes, and net
earnings); (iii) earnings per share; (iv) growth in earnings or earnings per
share; (v) stock price; (vi) return on equity or average shareholders' equity;
(vii) total shareholder return; (viii) return on capital; (ix) return on assets
or net assets; (x) return on investment; (xi) revenue; (xii) income or net
income; (xiii) operating income or net operating income; (xiv) operating profit
or net operating profit (whether before or after taxes); (xv) operating margin;
(xvi) return on operating revenue; (xvii) market share; (xviii) contract awards
or backlog; (xix) overhead or other expense reduction; (xx) growth in
shareholder value relative to the moving average of the S&P 500 Index or a peer
group index; (xxi) credit rating; (xxii) strategic plan development and
implementation; (xxiii) improvement in workforce diversity; (xxiv) customer
satisfaction; (xxv) employee satisfaction; (xxvi) management succession plan
development and implementation; and (xxvii) employee retention. Except as
otherwise provided herein, the extent to which the Performance Goals are
satisfied will determine the amount of the Award, if any, that will be earned by
each Participant. The Performance Goals may vary for different Performance
Periods and need not be the same for each Participant eligible for an Award for
a Performance Period.
6. EARNING OF AWARDS. At the end of each Performance Period, the Award will
be computed for each Participant. Payment of Awards, if any, will be made in
cash, subject to applicable tax withholding. Prior to payment of any Award, the
Committee shall certify in writing the extent to which the established
Performance Goals have been achieved. If the Performance Goals are not satisfied
to the fullest extent, a recipient may earn less than the full Target Award or
no Award at all. In addition, the Committee may in its sole discretion reduce
individual Awards otherwise payable pursuant to the Performance Goals.
7. TERMINATION OF EMPLOYMENT. In the event the employment of a Participant is
terminated by reason of death or disability during a Performance Period, unless
determined otherwise by the Committee, the Participant or his legal
representative, as applicable, shall receive a prorated payout with respect to
the Award relating to such Performance Period. The prorated payout shall be
based upon the length of time that the Participant was employed by the Company
during the Performance Period and the progress toward achievement of the
established Performance Goal(s) during the portion of the Performance Period
during which the Participant was employed by the Company. Payment of the Award,
if any, shall be made at the same time payments are made to Participants who did
not terminate employment during the applicable Performance Period. In the event
of a Participant's termination of employment by the Company for any other reason
prior to the end of the Performance Period with respect to an Award, the
Participant shall not be entitled to any payment with respect to such Award.
8. AMENDMENT AND TERMINATION. The Committee may amend, modify or terminate
the Plan at any time and from time to time. Shareholder approval of such actions
will be required only as required by applicable law. Notwithstanding the
foregoing, no amendment, modification or termination shall affect the payment of
an Award for a Performance Period that has already ended or increase the amount
of any Award.
B-2
9. GENERAL PROVISIONS.
a. Effective Date. The Plan shall become effective as of July 1, 1996,
subject to its approval by the shareholders of Cardinal Health, Inc.
b. Non-Transferability. Any interest of any Participant under the Plan
may not be sold, transferred, alienated, assigned or encumbered, other than by
will or pursuant to the laws of descent and distribution, and any attempt to
take any such action shall be null and void.
c. Severability. In the event any provision of the Plan is held to be
illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining provisions of the Plan, and the Plan shall be construed and
enforced as if such illegal or invalid provisions had never been contained in
the Plan.
d. Additional Arrangements. Nothing contained in this Plan shall
prevent the Company from adopting other or additional compensation arrangements
for any Participant.
e. No Right to Award or Employment; Uniformity. No person shall have
any claim or right to be granted an Award under this Plan and the grant of an
Award shall not confer upon any Participant any right to be retained as an
employee of Cardinal Health, Inc. or any of its subsidiaries, nor shall it
interfere in any way with the right of Cardinal Health, Inc. or any subsidiary
to terminate the employment of any Participant at any time or to increase or
decrease the compensation of any Participant. There is no obligation for
uniformity of treatment of Participants.
f. Tax Withholding. The Company shall have the right to withhold or
require Participants to pay the Company the amount of any taxes which the
Company is required to withhold with respect to such Award.
g. Beneficiaries. The Committee may establish such procedures as it
deems appropriate for a participant to designate a beneficiary to whom any
amounts payable in the event of the Participant's death are to be paid. If no
beneficiary is designated, the right of the Participant to receive any payment
under this Plan will pass to the Participant's estate.
h. Laws Governing. The Plan and all Awards made and action taken
hereunder shall be governed by and construed in accordance with the laws of the
State of Ohio, except to the extent superseded by federal law.
i. Government Regulation. Notwithstanding any provisions of the Plan or
any agreement made pursuant to the Plan, the Company's obligations under the
Plan and such agreement shall be subject to all applicable laws, rules and
regulations and to such approvals as may be required by any governmental or
regulatory agencies.
j. Unfunded Status of Plan. The Plan is intended to constitute an
unfunded plan for incentive compensation. With respect to any payments not yet
made by the Company to a Participant or beneficiary, nothing contained herein
shall give any such Participant or beneficiary any rights that are greater than
those of a general creditor of the Company.
B-3
[The text set forth below is not part of the proxy]
[Cardinal Health Logo]
ALL SHAREHOLDERS ARE URGED TO VOTE THEIR PROXY AS EARLY AS POSSIBLE.
Participants holding shares through any of the company's employee benefit plans
are urged to vote their shares no later than Friday, December 3, 2004, in order
to ensure complete voting by the applicable plan administrator.
Please see reverse side for information on voting your proxy by telephone or the
Internet.
FOLD AND DETACH HERE
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[Cardinal Health Logo]
PROXY - CARDINAL HEALTH, INC.
7000 CARDINAL PLACE
DUBLIN, OHIO 43017
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Anthony J. Rucci and Paul S. Williams, and each
of them, the attorneys and proxies of the undersigned with full power of
substitution to vote as indicated herein all the common shares, without par
value, of Cardinal Health, Inc. held of record by the undersigned at the close
of business on October 25, 2004, at the annual meeting of shareholders to be
held on December 8, 2004, or any postponements or adjournments thereof, with all
the powers the undersigned would possess if then and there personally present.
By returning this proxy card you are conferring upon management the authority to
vote in their discretion upon such other business as may properly come before
the meeting or any postponement or adjournment thereof.
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SEE REVERSE
SIDE
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[Cardinal Health Logo]
DETACH AND BRING TO MEETING
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The Vote by Telephone and Vote by Internet systems can be accessed
24-hours a day, seven days a week until 11:59 p.m. the day prior to the meeting
Your vote is Important. Please vote immediately.
Vote-by-Internet Vote-by-Telephone
OR
Log on to the Internet and go to Call toll-free
http://www.eproxyvote.com/cah 1-877-PRX-VOTE (1-877-779-8683)
-----------------------------
If you vote over the Internet or by telephone, please do not mail your card.
FOLD AND DETACH HERE
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[ X ] Please mark your votes as in this example.
1. Election of Directors.
THE BOARD RECOMMENDS A VOTE FOR THE NOMINEES LISTED BELOW.
Nominees: George H. Conrades, Robert L. Gerbig and Richard C. Notebaert
[ ] FOR ALL [ ] WITHHELD ALL
[ ]
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FOR ALL EXCEPT vote withheld from the nominee(s) whose name(s) is written on the
space provided above
2. [ ] FOR or [ ] AGAINST or [ ] ABSTAIN -- Proposal to amend the Company's
Performance-Based Incentive Compensation Plan and approve the material
terms of the performance goals under such plan, as amended. THE BOARD
RECOMMENDS A VOTE FOR THIS PROPOSAL.
3. [ ] FOR or [ ] AGAINST or [ ] ABSTAIN - Proposal from a shareholder on
annual election of directors, if presented properly. THE BOARD RECOMMENDS A
VOTE AGAINST THIS PROPOSAL.
4. To transact such other business as may properly come before the meeting or
any adjournment or postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED BY THE SHAREHOLDER.
IF NO SPECIFICATIONS ARE MADE, THE PROXY WILL BE VOTED TO ELECT THE NOMINEES
DESCRIBED IN ITEM 1 ABOVE, FOR PROPOSAL 2, AGAINST PROPOSAL 3, AND WITH
DISCRETIONARY AUTHORITY ON ALL OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE
ANNUAL MEETING OR ANY POSTPONEMENTS OR ADJOURNMENTS THEREOF.
Please sign as your name appears hereon. If shares are held jointly, all holders
should sign. When signing as attorney, executor, administrator, trustee or
guardian, please give your full title. If a corporation, please sign in full
corporate name by president or other authorized officer. If a partnership,
please sign in partnership name by authorized person, indicating where proper,
official position or representative capacity.
Receipt of Notice of Annual Meeting of Shareholders and the related Proxy
Statement is hereby acknowledged.
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SIGNATURE DATE SIGNATURE DATE